PRESENT  STATUS  OF  BANKING  IN 
BRITISH  INDIA 


By 

BHUPENDRA  NATH  BYSACK 

B.  S.  University  of  Illinois,  1921 


THESIS 

SUBMITTED  IN  PARTIAL  FULFILLMENT  OF  THE  REQUIREMENTS 
FOR  THE  DEGREE  OF  MASTER  OF  SCIENCE  IN  ECONOMICS 
IN  THE  GRADUATE  SCHOOL  OF  THE  UNIVERSITY 
OF  ILLINOIS 


URBANA,  ILLINOIS 
1922 


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1 HEREBY  RECOMxMEND  THAT  THE  THESIS  PREPARED  UNDER  MY 
SUPERVISION 
ENTITLED. 


BE  ACCEPTED  AS  FULFILLLNG  THIS  PART  OF  THE  REQUIREMENTS  FOR 


Head  of  Department 


Recommendation  concurred  in* 


A f 


Committee 

on 

Final  Examination* 


Required  for  doctor’s  degree  but  not  for  master’s 


In  the  prepara,tion  of  this  thesis  the 
writer  feels  that  he  owes  much  to  Prof.  N.A. 

Weston  and  to  Prof.  E.L.  Eos'art  for  their 

many  suggestions  and  constructive  criticisms. 

He  also  acknowledges  helpful  suggestions  from 

the  memhers  of  the  Economic  Seminar. 


C0I7TENTS . 


Chapter  Page 

I.  Introduction.... . T 

II.  The  Banking  System  of  India  4 

III.  The  Function  of  Indian  Banks  23 

IV.  Situation  of  the  Indian  Banks 

from  1913  to  1918 33 

1.  Failure  of  the  Indian 

Joint  Stock  Baiiks  40 

2,  Effect  of  the  Grea,t  War 

on  Indian  Ba.nking  47 

V,  A Central  Bank  for  India  and  the 

Amalgamation  of  the  Presidency 

Banks 54 

VI.  Conclusion  62 

Bibliography 68 


Digitized  by  the  Internet  Archive 
in  2015 


https://archive.org/details/presentstatusofbOObysa 


I 

Chapter  I . 

Introduction. 

The  new  field  of  banking  which  has  been  developed  since 
the  modernisation  of  industries  has  attracted  wide  attention  throu^- 
out  the  world.  In  almost  all  the  countries  where  experiments 
ha,ve  been  conducted  for  quite  a long  time,  these  experiments  have 
recently  resulted  in  fruitful  achievements.  Many  stages  have 
passed  in  its  history  until  principles  have  been  evolved  which 
ensure  the  safe  carrying  on  of  its  trade.  The  operations,  as  the 
system  has  been  improved  upon  in  the  last  century,  appear  at  first 
sight  to  be  rather  complex  and  difficult  of  comprehension.  But, 
this  is  not  due  to  any  mystery  in  the  operations  themselves;  rather 
it  is  the  result  of  their  multiplicity  and  of  the  varied  conditions 
under  which  they  take  place.  The  needs  which  the  banks  supply 
are  of  a simple  kind,  sure  to  arise  in  any  commercial  or  industrial 
comrmrnity  in  which  there  is  mutual  confidence  among  men.  The 
transactions  by  which  these  wants  are  satisfied  are,  moreover,  as 
simple  as  the  wants  themselves,  and  they  may  easily  be  carried 
on  by  any  joint  stock  company  as  it  is  being  proved  to-day. 

India,  from  very  early  times,  had  been  commercially 
important  among  the  rest  of  the  nations,  but  she  hardly  developed 
any  bankii]g-  system,  worthy  of  great  coirmient,  like  the  medieval 
Venetians  or  the  Dutch  in  Holland.  But,  she  had  a method  7/hich 
was  quite  efficient  to  transact  the  business  of  the  government  as 
well  as  to  assist  in  the  movement  of  the  internal  trade  of  the 
country.  The  system  as  it  was  then  prevailing  was  of  a type  of 


3 

high  class  of  merchant  firms  vvho  combined  their  business  of  banking 
with  the  ordinary  business  of  the  firms.  There  was  also  a cla5s 
of  people,  called  money  lenders  who  advanced  money  on  a mortgaged 
chattel,  e.nd  gave  loans  to  cultivators  and  farmers  at  a high  usury. 
The  system  which  was  then  in  existence  is  still  in  e\’’idence  to-day; 
and,  in  spite  of  the  appearance  of  joint  stock  banking,  it  still 
plays  an  important  part  in  the  banking  role  of  India’s  business. 
Though,  owing  to  British  influence  in  the  country,  there  are  to-day 
many  banking  institutions  established  after  the  western  model; 
yet,  there  is  much  to  'oe  done  by  many  such  institutions  at  present 
and  in  future.  Since  the  advent  of  the  British  the  country  has 
been  apparently  prosperous,  and  the  number  of  institutions  has  been 
somewhat  increased;  but  not  so  proportionately  as  the  commerce  of 
the  country  has  been  developed. 

For  the  purpose  of  presenting  India's  banking  status,  the 
paper  has  been  divided  into  several  chapters,  dealing  at  first 
with  the  growth  of  the  banking  institutions  and,  then,  with  the 
character  of  business  they  perform.  In  other  chapters  such 
questions  as  the  failure  of  Indian  banks,  effect  of  the  great  war 
on  banking  institutions  in  India,  and  the  establishment  of  a central 
bank  have  been  respectively  considered.  In  conclusion,  an  attempt 
has  been  made  to  show  the  banking  need  of  India  and  the  spread  of 
the  banking  habit  among  the  people . The  paper  is  by  no  means  an 
exhaustive  study  of  these  questions;  but  is  mors  or  less  a surface 
scratching  of  the  subject,  and  a great  deal  can  be  written  in 
detail  on  some  of  them  which  have  been  dealt  with  here. 

Several  banking  terms  of  India  used  in  this  connection 
have  been  left  in  the  original , without  being  translated  into 


3 


English,  lest  the  peculiar  meaning  which  they  convey  should  be 
misconceived.  Such  terms,  however,  have  been  explained  in  the 
foot-notes  so  as  to  make  them  comprehensible  to  the  reader.  In 
the  statistics  and  data,  the  figures  have  been  used  in  Indian 
money  and  in  Indian  counting  method,  but  an  explanation  of  them 
has  also  been  sriven  in  the  foot-notes.  The  rupees  have  not  been 
converted  into  American  coins  because  the  exe.ct  equivalents  could 
not  be  determined  at  the  different  periods.  It  is  believed,  that 
no  trouble  will  ’ce  encountered  in  understanding  the  statistics  in 
terms  of  ru.pees,  in  lakhs (lOO, 000 ) , and  in  cr ores (lO, 000, 000 ) , 

In  preparing  this  paper,  materials  were  sought  from 
India  as  well  as  from  England,  but  with  no  results  as  no  printed 
matter  on  the  subject  of  India^n  banking  was  available  with  the 
exception  of  scm.e  government  documents  and  a few  books.  It  is 
desirable,  therefore,  that  more  books  should  be  written  on  Indian 
banking  by  persons  interested  it  it,  so  that  any  future  writer 
who  would  like  to  take  up  any  subject  concerning  Indian  banking 
would  have  plenty  of  material  at  his  disposal  to  handle  it 
efficiently  and  critically. 


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4 


Chapter  II . 

The  Banking  System  of  India. 

Banking,  as  a rule,,  means  dealing  in  credit.  It  consists 
in  the  hankers  and  hanking  firms  keeping  money  for  their  customers 
subject  to  v/ithdrawal  on  specific  conditions.  They  &.dvance  or 
loan  money  on  security,  and  purchase  and  sell  hills  of  exchange, 
bonds,  stocks,  promissory  notes  etc.  In  India,  even  before  the 
appearance  of  modern  joint  stcck  hanking,  these  operations  were 
evident.  There  were  numierous  hanking  firms  and  hankers  who  carried 
on  business  on  a large  scale.  The  operation  of  money  lending  was 
and  is  done  by  various  persons  of  every  caste  and  class  in  towns 
and  villages  all  over  the  country.  These  people  are,  in  a true 
sense,  the  money  lenders  of  India,  and  lend  money  for  almost  all 
kinds  of  demands.  As  distinguished  from  them,  the  hankers  are  a 
class  who  had  a semi-official  recognition,  and  who  took  money  on 
deposit,  made  loans,  and  issued  drafts,  or  'handies’.  It  is 
this  class  which  has  always  occupied  a high  status  in  India.n 
society,  hut  no  one  should  confuse  them  with  hankers  in  the  modern 
sense  of  the  word.  They  are  something  like  the  goldsmiths  of 
England  about  two  centuries  ago. 

In  former  times  the  go-''-ernment  borrowed  largely  from  such 
hankers  for  the  purpose  of  financing  military  campaigns.  The 
Peshwas*,  for  instance  were  heavil^r  indebted  to  them  and  several 
firms  enjoyed  great  social  reputation  on  account  of  the  extent  of 

* Ruling  class  cf  Western  India. 


5 


their  transactions  and  the  honesty  of  their  dealings. 

The  small  Indian  hankers  took  deposits  also,  and  allowed 
interest  upon  them.  They  also  granted  loans  on  the  security  of 
jewelry  pledged  with  them,  and  purchased  and  sold  oullion  and 
ornaments.  This  business  is  being  carried  on  to-day  to  a great 
extent  in  villages  and  smal]  towns  all  over  India,  where  modern 
banicing  is  unknown.  The  banking  houses  of  a higher  status  deal 
on  a much  larger  scale.  They  finance  internal  trade  and  remit 
funds  from  once  place  to  another  for  their  customers  and  discount 
the  'hundies ’ of  bills  of  small  producers  and  traders.  They 
very  often  combine  trade  with  banking.  In  spite  of  the  rapid 
progress  joint  stock  banks  have  m.ade  during  several  decad.es  past, 
these  indigenous  banking  houses  still  play  a highly  important  part 
in  financing  the  internal  trade  of  the  country.  Mr.  Findlay 
Shirras  describes  the  indigenous  bankers  very  clearly  and  throws 
much  light  on  banl'ing  conditions  previous  to  the  coming  of  the 
Westerners,  He  says,  ’’Before  the  British  era,  trade  was  entirelj’' 
financed  by  the  Eania.s*,  who  combined  money  lending  and  finance 
with  trade.  Throughout  the  length  and  breadth  of  India,  these 
Banias  undertook  the  financing:  of  agricultural  operations.  To-day 
the  money  lender  or  money  changer  is  still  in  a flourishing  con- 
dition. The  large  bankers  and  shroffs**  still  continue  to  do  a 
large  part  of  the  internal  banking  business.  They  were  the 
depositories  of  much  of  the  money  wealth  of  the  villages  or  dis- 


* Merchant  class  of  India. 

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the  banks , 


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6 

tricts  in  which  they  resided  and  they  were  also  engaged  in  exchange 

operations,  as  well  as  trading  on  their  own  account.  They  used 
’hundies’  or  hills  which  were  drawn  up  in  'Mahajani'  or  a written 
character  peculiar  to  hankers,  and  these  were  usually  illegible  to 
any  one  outside  their  class.  A dishonoured  'hund.i  ’ or  hill  was 
an  event  of  rare  occurence  with  them.  ’Hundies’  despite  the 
increase  in  joint  stock  hanking,  were  not  decreasing  hut  increasing 
and  the  circulation  of  ’hundies'  was  the  most  perfect  portion  of 
the  purely  Indian  system.  The  Bania  class  was  one  to  which 
India,  was  greatly  indebted  for  financing  agriculturists,  and  re- 
moving products  from,  the  growing  to  the  consuming:  districts  3.nd 
distributing  goods  of  all  kinds  all  over  India*”.  What  Mr, 

Shirras  says  is  true  even  at  the  present  time. 

The  introduction  of  the  Western  hanking  system  in  India 
could  he  dated  as  far  hack  as  l'^70.  After  the  occupation  of 
Bengal  'ey  the  British,  the  administration  of  the  country  passed 
over  to  them,  and  many  English  merchants  estehlished  themselves 
in  Calcutta.  As  the  business  hegs.n  to  grow  and  the  profits 
heca.m.e  tremendous,  the  merchants  at  Calcutta  decided  to  establish 
there  a hank  after  Western  model.  The  la.te  firm  of  Messrs. 
,Alexander  & Co.,  very  energetically  took  up  the  matter  and  founded 
the  Bank  of  Hindusthan  in  17?0,  It  was  the  first  institution 
of  the  kind  in  India,  Though  it  v;as  a branch  of  the  husinesc;  of 
one  of  the  first  firms  of  the  period,  its  operations  were  entirely 
distinct  from,  their  trading  business.  It  continued  its  opera,tions 


* Report  of  a lecture  delivered  in  Calcutta,  1914. 


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till  the  month  of  Deceiiiber,  183S,  when  the  most  severe  commercial 
crisis  that  ever  occurred  in  India  caused  the  discontinuance  of 
this  bank.  The  bank  had  its  own  note  circulation  which  was  con- 
fined entirely  to  Calcutta  and  the  immediate  neighborhood.  The 
notes  were  not  recognised  as  lega.l  tender,  and  there  were  very 
few  left  in  circulation  when  the  house  failed.  There  were  also 
some  other  agency  houses  at  that  time  which  shared  the  same  fa.te 
in  the  crisis . 

The  foreign  trade  of  India  in  the  ea^rly  part  of  the  last 
century  was  comparatively  small  and  internal  exchange  was  facili- 
tated by  indigenous  bankers.  Hovirever,  as  trade  slowly  expanded, 
European  merchants  and  others  d.irectly  interested  in  it,  felt  the 
necessity  of  having  bariking  arrangements  of  the  Western  type  in 
their  midst.  Like  the  mercantile  commurdty  the  government  also 
experienced  difficulty  in  carrying  on  its  financial  operations 
without  the  assistance  of  a well-conducted  modern  bank.  It  was 
these  circumstances  that  gave  rise  to  modern  banliing,  and  the  first 
important  bank  was  opened,  in  1606,  under  the  name  of  the  Bank  of 
Calcutta  with  a,  capital  of  fifty  lakhs  of  rupees*in  five  hundred 
shares  of  ten  thousands  rupees  eacht*  The  first  charter  was 

granted  in  1809  on  which  occasion  the  name  was  altered  to  that 
which  it  had  till  1920,  viz.,  the  Bank  of  Bengal.  Thus,  a system 


* The  American  equivalents  of  Indian  money  are  as  follows:  Rupee - 
16  annas  = |0.3244;  anna  =12  pies;  15  rupees  are  equivedent  to 
£1.  The  sum  of  100,000  rupees  is  called  a la,kh  and  of  10,000,000 
rupees  a crore. 

*♦  Shirras,F.G.  — Indian  Finance  and  Banking,  p.  346. 


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8 


of  Indian  banking  appeared  under  govermnent  charter;  and,  at 
present,  the  system  may  be  said  to  comprise  four  categories,  viz., 
(l)  the  Presidency  Banks*;  (s)  the  European  Exchange  Banks;  (3)  the 
Indian  Joint  Stock  Banks;  (4)  the  Private  Indian  Banking  firms, 
and  money-lenders  like  the  Shroffs ,Bania,  etc.  These  four  classes 
of  institutions  mainly  constitute  the  Indian  banking  machinery. 

The  following  paragraphs  are  devoted  to  the  study  of  these  four 
types  of  Indian  banks.  The  character  Of  their  business  will  be 
taken  up  in  the  next  chapter. 

The  first  Presidency  Bank  was  established  in  Calcutta 
in  1809  under  the  name  of  the  Bank  of  Bengal.  Its  charter  provided 
that  ” the  affairs  of  the  bank  shall  be  managed  by  nine  directors, 
three  of  whom  shall  be  nominated  by  the  government  to  represent 
its  interest  (lOO)  shares,  and  six  by  the  proprietors;  that  no 
person  shall  be  entitled  to  vote  who  shall  not  be  possessed  of  one 
share  of  the  capital,  registered  a,s  such  in  the  bank-books;  that 
the  presence  of  three  directors,  at  least,  shall  be  necessary  to 
constitute  a board  to  transact  business;  that  dividends  shall  be 
determined  by  the  directors  upon  the  grounds  of  the  actual  profits 
of  the  bank,  during  the  period  for  which  such  dividends  shall  be 
made;  that  upon  giving  only  one  year’s  notice  the  government  may 
put  an  end  to  the  corporation;  tha.t  there  shall  be  two  general 
meetings  of  the  proprietors  every  year,  when  the  directors  shall 
submit  a statenent  of  the  transs-ctions  of  the  bankt*”.  To  make 

♦ The  Presidency  Banks  have  been  amalga.mated  in  1920  under  the  name 
of  the  Imperial  Bank  of  India.  The  subject  is  discussed  in 
chapter  V. 

**  Cooke,  C.  N,  — Banking  in  India,  p.  95. 


9 

fnis  bank  secure  the  government  Was  to  aid  it  by  contributing  as 
a shareholder  to  the  extent  of  one-fifth,  by  sharing  in  its  direc- 
tion, and  in  the  privilege  of  voting. 

The  bank  is  directly  connected  with,  and  to  a consider- 
able extent  supported  by  the  capital  of  the  government,  which 
holds  275  shares  of  the  value  of  rupees  4,000  each.  The  manage- 
ment is  vested  in  a board  of  nine  directors;  of  these,  six  are 
elected  by  the  proprietors,  the  other  three  being  high  officials 
of  the  government  who  are  nominated  to  watch  over  its  interests. 

The  meeting  of  the  directors  is  held  every  Thursday  morning  when 
they  severally  receive  a fee  of  twenty  five  rupees  as  remuneration 
for  the  time  and  attention  they  give  to  the  affairs  of  the  bank. 

Up  to  the  close  of  the  1862,  the  ba.nk  under  its  old 
charter,  had  the  exclusive  privilege  of  a circulation  of  bank  notes 
which  limited  to  two  crores  of  rupees.  In  Feb.  1662,  the  govern- 
ment granted  a new  charter  without  any  limitation  as  to  existence, 
clause  2 declaring  that  " from  and  after  the  coming'  into  operation 
of  this  act,  the  present  and  future  proprietors  of  the  Bank  of 
Bengal  shall  continue  to  be  a body  corpors.te  with  perpetual  success, 
and  enjoy  all  the  rights,  privileges  and  immunities  incident  to  a 
corporation  ag-gregate” , On  this  occasion  the  privilege  of 
issuing  notes  was  withdrawn  from  the  bank,  the  government  havirig 
decided  upon  the  introduction  of  the  state  currency.  Under  a’ 
clause  of  this  charter  the  bank  commenced  the  establishment  of 
branches,  which  are  locau.ed  in  these  places:  Agra,  Akyab,  Allahaba,d, 
Benares,  Cawnpore,  Chittagong,  Dacca,  Hyderabad  (Deccan),  Jalpaigu.ri, 
Lahore,  Lucknow,  Moulm.ein,  Nagpore,  Naraingunge,  Putna,  Rangoon, 


.,.  V ■ • ' , ' ; 7'"  . ,,  , ; * ,■  - ‘v  ...„,,■  •'»  ‘ .w.  V * 

1;''"  , V ■ ' 


■ ’,■■'  i * ‘S'/  '■  '^  *'  ■ ^ 


■#  / 


!i  ^ Mftff, **i:.*' 

IR  fc/-*'.  "': '''•  ’ ■ '.  ' "i  ■ . •-■  • 

I p’^'-%^;^;Ti  iifT  ,.iii 


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,.'A  -V-  • ^i.^-  ►iimjcjii’ly’ 

t . ' . ■’  ' ., : ' ^;-*'  * 7.  ' ,;  ■/#  ■ 

y tfV.'^'  i'i  t>t.  •tic'j.  A/  yi-ii?  AC"  , 

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: .’iT  , ' ’ 

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p 


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- 1 i .i#ji*’w' ''l<‘x  !iii'~ay  t'.iiati 

' ...  "m  - 

u;  . J * ^ .I#'; . \ 

tei.  . M . n „.  . .!  -.sm..  ^ ,1,.  -^(,  ' ^'  “ iii>»... 


'■I ' 


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...  A.'iii»  . ifr’X  :iiftoii«i4tC'- "'S  lyLw  X Wr»  jwit  v.-  ' "‘ 


10 


Secunderatad,  and  Simla. 

Next  in  order  of  the  Presidency  Banks  are  the  Banks  of 
Bombay  and  M^-dras . Banking  in  Bombay  appears  to  have  been,  for 
a considerable  period  of  time,  in  the  hands  of  a very  limited 
number  cf  large  capitalists.  About  the  close  of  the  year  1836, 
a proposition  was  brought  forward  for  establishing  a chartered  bank 
at  Bombay,  which  was  to  be  based  on  the  most  liberal  principles. 

The  same  amount  of  capita,!  was  to  be  provided  as  in  the  case  of 
the  Bank  of  Bengal,  but  the  government  was  to  subscribe  only  three 
lakhs.  The  charter  was  not  passed  until  1840.  The  bank  was 
able  to  commence  business  in  the  same  year,  four  ^/-ears  after  it 
was  projected. 

The  bank  is  governed  by  a board  of  nine  directors  who 
receive  no  remuneration  for  their  services.  Six  directors  are 
elected  by  the  proprietors,  whose  qualifications  are  that  each 
should  be  possessed  cf  12  shares  in  his  own  name.  The  other 
three  are  appointed  by'’  the  government.  The  directors  have  the 
power  to  appoint  all  the  officers  of  the  bank  and  to  fix  their 
salaries.  It  is  interesting  to  observe  that  in  the  case  of  the 
Bank  of  Bombay,  two  of  the  directors  are  Indians  where  as  in  other 
Presidency  Banks  there  are  none  at  all.  The  reason  is  that  the 
merchant  commuriity  of  Bombay  is  more  strongly  Indian  in  composition 
than  th8.t  of  any  other  presidencies.  The  bank  was  authorized  by 
the  charter  of  1882  to  estsblish  branches.  They  are  at  present 
located  in  Ahmedabad,  Ahmedabad  city  (sub-,  branch),  Akola,  Amraoti, 
Broach,  Hyderaba,d,  Indore,  Jalga^on,  Karachi,  Poona,  Quetta, 

Rajkot,  Sholapur,  Sukkur  and  Surat. 

The  third  and  the  last  cf  the  Presidency  Banks  is  the 


■ . 

*•  1-  .:% 


.*»  '•',  ►!».* 


. ..  ' ■ ..  ',  :yV«l  . .;  •My.  !* 


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i - t..;l4  - • "'  -is 


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" *■ ' I ' i C ' ■*  - ’ ' ■ ■ “ " .|  • u ' 1 -*' * f|^''  • ';jg 

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4 T-u ''i 

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.,  •,y,^'i'  , i',  ,'. h>a 


Vj.  'VI 


wtgawj  /'TVw*'9'»  TO|i  rsfy '. 

I®' . ;’■  ■-  4i  ■ 4i'-.;’’  .^SSSl 


%* 


II 


Bank  of  Madras.  Previous  to  the  estahlishnient  of  this  institution, 
there  existed,  at  Madras,  a bank  which  conducted  business  on  a very 
small  scale,  and  had  a circulation  of  a very  limited  amount.  As 
it  was  not  suited  to  the  needs  of  the  second  Presidency  in  India, 
it  was  determined  to  start  a new  institution  which  was,  in  almost 
every  respect,  on  the  plan  of  the  Bank  of  Bengal.  The  act  of 
incorporation  was  passed  by  the  supreme  government  in  1843,  and  the 
bank  came  into  operation  in  the  same  yea.r.  The  capital,  fixed  to 
commence  with  was  thirty  lakhs  of  rupees.  Three  lakhs  were  to  be 
the  property  of  the  governor  in  council  of  Madras.  The  number  of 
shares  subscribed  was  three  thousand,  of  one  thousand  rupees  each. 

The  bank  is  managed  by  nine  directors  of  whom  three  are  appointed 
and  are  removable  by  the  governor  in  council  at  Madras.  The  re- 
maining six  are  elected  at  a general  meeting  of  the  proprietors. 

In  1662,  the  privilege  of  issuing  notes  was  withdrawn  from  the 
bank,  government  currency  notes  being  substituted  . But,  under 
the  charter,  branches  were  allowed  to  be  established.  They  are 
now  located  in  Allep^'-,  Bangalore,  Bellary,  Bimlipatam,  Calicut, 
Coconada,  Cochin,  Coimbatore,  Colombo,  Gimtur,  Madura,  Mangalore, 
Muslipa^tam,  Nagapatam,  Ootacamund, Sakem  , Tellicherry,  Trichinopoly , 
Trivandrum,  and  Tut ic or in. 

The  Presidency  baiics  - the  Bank  of  Bengal,  the  Bank  of 
Bombay  and  Bank  of  Madras  - have  at  present  capitals  of  about  two 
crores,  one  crore,  and  75  lakhs  of  rupees  respectively.  Their  re- 
serves* are  about  equal  to  their  respective  capitals  and  their 
shares,  fully-paid-up,  stand  at  or  over  three  times  their  face  value. 


* By”reserve''  is  meant  the  additional  funds  accumulated  from  the 
operations  of  the  bank,  i.e.,  surplus. 


SiV .Sit  '■ . ■■- 


•‘^'V'-  ' ■ -■  -,  ■ ' ‘I'.  Vi 


:’i '?,  '^'iV'^'jJ 


< ,.  'iL'^L'  <i  -'s  . ' ■^  'll';- 


X ;v«tr»t  «I-  ' ■ 'M(&  '^•  f -tf t 


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r »,' 


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■?/c 


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<«>.V  , ';.vd 


”-n  'i  ’y '' ' ' ^>' 


12 

The  grea,ter  part  of  their  capital  is  held  toy  European  shareholders. 
The  operations  of  the  Banks  of  Bombay  and  Madras  are  confined  to 
their  respecti^’e  Presidencies.  The  Bank  of  Bengal  covers  the  rest 
of  India. 

The  Presidency  Bank  Act  of  1876  brings  about  a different 
relationship  between  the  government  and  the  Presidency  Banks.  It 
imposes  certain  definite  restrictions  upon  their  business  operations 
while  it  concedes  to  them  some  material  and  moral  advantages  also. 
Before  that  date  the  agreement  with  the  ba,nks  com.pelled  the  govern- 
ment to  place  all  the  cash  balances  bel orbing  to  it  in  the  hands 
of  the  banks,  with  the  result  that  there  was  a serious  danger  of 
the  government’s  money  not  being  available  when  it  was  urgently 
reouired.  After  the  passage  of  that  Act,  the  government  was 
required  to  keep  a minimum  balance  in  the  Presidency  Banks;  but, 
in  practice,  it  keeps  a larger  amount  and  is  more  liberal  to  them 
than  is  provided  in  the  agreement. 

Next  in  order  in  the  banking  system,  of  India  are  the 
Exchange  Banks.  These  are  large  European  banking  concerns,  and 
carry  on  their  operations  in  India  and  throughout  Asia.  Their 
importance  from  the  point  of  view  of  banking  development  in  India 
is  not  great;  but  still  they  play  a certain  role  which  has  a con- 
siderable bearing  on  business  in  India.  For  the  sake  of  conve- 
nience they  may  be  classified  in  two  groups  according  to  the  extent 
of  business  done  by  them  in  India,  viz.,  (l)  those  doing  a consider- 
able proportion  of  their  total  business  in  India,  and  (s)  those 
which  are  no  more  than  agencies  of  large  banking  corporations  doing 
business  all  over  Asia.  These  banks,  which  finance  India's  foreign 


It. 


i 'wU 


■ y 

.;  n':--.  vs 


■i^ 


ao; 


f '!|W . , . '^.**  , ^■■  ' 

Ti:7iifi^nitv  ..  .,..,4'‘-  i^\U  tc,,  4 “,{ 

■ :■  ±"  ■ , •>'  , ' -...v 


' '*  "L 


CiVi*  ,.vA>.?ut  ■'  4'<j  ' c-'-r?'  V:  iMrt  tfww ?>«■<•’ #<frcr ji 


' ‘' ’ >-r  ■■' 

**  ~'  T*  ''  * ^ ^ f'^li^^'ii  h *■«  lll^A  Oii’  ftilPjAftiT  s-i.;.W 


rt.  ■ ’ ' ' ' . , ^/  'i'  . ' ' ^ *‘  • 

-isic^- -i;4  '■*’  - Cw/-  V. :*':.t,  'i/J/t'  '‘^£i 

1 ' *S  ' y*‘  ■*  ' .'V  ■'  *',  ' r*.  : ' :*‘‘ ';  t^rr 

Jy  ':  ' ■ ' ’ ; .;/'v  '■•  . '..■ 

M :itnsr  h„  ^ ^4*'  ^moif(  ^^y/i9$nrMtOQ 

V (j  ■ *’'  *'  ' ^ ''  r , '■i'liljiy 

'.  y ••a.4|tt'‘<Vv./  y . ,^'^Ai  i/*i‘  •#<•■>11  A" 


/.jy  * 


• *•  »'■*  V'  ' ...  ..  , , j ^ 

..  .-‘..I  -\  : <r'  ,/r,  t.\^fin^-j^'j  «t  ^,k{c 

yrtf  . c;..T  *. .•  ..iTT^^-;'  ! ,ia»»4eC 

■ ■ ■ ',  : ^'^;.  ■; 


-y  :-i 


,jL  ■»  >■  I s.  'A  . '■'  f-‘^.  . » h ■ I ^ T,'m»  .-•  ’ ^‘  '’  S 

{ ^ . - ' ^ \ .4'Z.anij  ' * 'Al  <*  ’i.'*'  'jlt,»— , r-  ’.  ‘ * 


■ ' ’ ' , vv^  ■ ' i.,  ' .'I'^-fc  * 'y '-■'f'w  '] 

1.^1kC ii;; • ■■•'' ^^,flwv  T , V w *, 


■ * * 


afc'.i.'.'^ ' . £5'-  i '-.iJifiLitictljSfeLsjiai!^'^^  . ; ;■  •«.!',:;ii^ 


i /'rv.  ■'■  U;  '*■  • 


13 


trade,  are  : Chartered  Bank  of  India,  Australia.,  and  China;  Delhi 
and  London  Bank;  Hongkong  and  Shanghai  Banking  Corporation;  Nation- 
al Bank  of  India;  Mercantile  Bank  of  India.;  Eastern  Ea.nk ; Cornptoir 
National  d’Escompte  de  Paris;  Yokohama  Sperie  Bank;  Deutsch-Asiar- 
tische  Bank;  International  Banking  Corporation,  and  Russo- Asiatic 
Bank,  The  last  five  banks  are  included  in  the  second  group, i.e., 
they  are  no  more  than  agencies  in  India.  They  represent  in  India. 
French,  Japanese,  German,  American,  and  Russian  interests  respec- 
tively, and,  therefore,  they  are  considered  less  prominent  in  the 
affa.irs  of  India.n  banking'. 

The  first  six  banks  belong  to  group  one.  The  oldest  one 

is  the  Delhi  and  London  Bank,  established  in  1844,  The  Eastern 

Bank  is  a recent  one  and  was  established  in  1^10,  The  rest  are 
pretty  old  ones,  and  began  operations  before  the  eighties.  Of 
these,  two,  the  Chartered  Bank  of  India,  Australia,  and  China,  and 
the  Hongkong  Shanghai  Be^nking  Corporation  have  very  large  interests 
in  other  parts  of  the  East,  especially  in  China;  but  this  doss  not 
prevent  their  Indian  connection  from  being  important.  The  other 
four  are  primarily  Indian,  but  not  exclusively.  It  is  noticeable 
that  all  the  Exchange  Bcnks  which  still  survive  were  founded  before 
IRIO.  This  is  true  in  spite  of  the  fact  that  most  of  them,  es- 
pecially in  the  last  decade,  have  proved  very  successful  from  the 
shareholder’s  point  of  view.  Mr.  J.  M.  Keynes,  in  his  book 
"Indian  Currency  and  T?inance”,  writes  in  this  connection  tha.t  " it 
Would  be  exceedingly  difficult  to  start  a new  exchange  bank  at  the 
present  ti^e,  except  under  the  aegis  of  some  important  financial 
house  already  established  in  strong  position  in  India.  Indian 


cs.-  XI*  3c»^  -vy; 


'M 


,^:^;’&/.-nr,  i,;-.i-  ,kti-.  «i-.’.  ..*-  ;S..'.^ '>'a.  _:;  ^t^e-st- 


”!4-  • ;,  ':^ 

<.'''  ' ‘ %*  • A''^l  ' ‘ . . '‘'ii  -t  ■illi'Pl  ^ 

ii  fJVy..it»/^Jt-*li-'4(i)®'  ; "iftrf:.;  - /*'*f  ,■  iiffc4wjir'“ 


,,-■  ■,<«  - . 


'M. 


<v 


x'^'-  V*  7 * fr*  ^'fi  ■_  . " ,-  ■ 


*t 


£•♦61  *-*<>£■  ^jiki '' 


- 5-  ■ ■ ’^i:  iT) 


■ - Vf  ' * .1  i 

-■  gi-  ■;  - ■ 

' '•. » *■  . 


I*  ^ 

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14 

Exchange  banking  is  no  business  for  speculative  or  enterprising 
outsiders,  and  the  large  profits  which  it  earns  are  protected  by 
established,  and  not  easily  assailable,  advantages”. 

The  head  offices  of  all  these  Exchange  Banks  a.re  located 
outside  of  India,  scattered  all  over  the  world  and  representing 
primarily  the  interests  of  the  countries  where  their  head  offices 
are  established.  The  cash  they  hold  in  India  is  of  very  limited 
amount  and  represents  only  a small  fraction  of  their  liabilities 
to  private  depositors  in  India.  These  banks  are  not  under  strict 
regulations  in  India,  but  enjoy  patronage  from  official  circles 
in  many  ways . 

The  third  class  of  banks  in  India  is  the  Joint  Stock 
Banks.  These  institutions  are  almost  all  of  recent  origin. 

The  growth  of  this  type  of  banks  has  taken  place  during  the  last 
two  decades.  There  were,  however,  some  Joint  Stock  Banks  which 
were  established  in  the  forties  and  fifties  of  the  last  century. 
Such  banks  were  the  Agra  Bank  (l833-l!^00 ) , the  Simla  Bank  (lB44), 
and  the  Dacca  Bank  (l846).  They  all  did  useful  work.  The  Dacca 
Bank  was  founded  in  164S  with  a capital  of  five  lakhs  of  rupees 
in  shares  of  1000  mpees  and  500  rupees  each.  In  166S,  the 
Bank  of  Bengal  in  accordance  ■'''ith  its  charter,  took  over  the  Dacca 
Bank,  the  shareholders  receiving  an  equivalent  for  their  shares  in 
the  Bank  of  Bensral  stock. 

Iw' 

Besides  these  three  there  are  others  which  may  be  meiv- 
tioned  here.  The  Allahabad  Bank,  the  Alliance  Bank  of  gimla,  and 
the  Oudh  Commercial  Bank  belong  to  the  last  century  group.  The 
Allahabad  Bank  was  established  in  1365.  The  paid-up  capital  is 


,’  I • ■ A-*' 


-V  ’V  ■ . ,,  .,  ..  , . 

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15 

now  Rs . 30  lakhs.  The  head  office  is  at  Allahabad  and  there 
are  fourteen  branches  with  twelve  subagencies.  Although  the  bank 
com'nenced  operations  in  1665,  the  first  branch  was  not  opened 
until  twenty  three-years  later,  when  a branch  was  opened  at  the 
same  place.  The  Alliance  Bank  of  Simla  was  established  is  1874, 
Its  head  office  is  at  Simla,  It  has  thirty-nine  branches  and 
eleven  sub-agencies.  The  paid  up  capital  in  1917  was  Rs.84  lakhs. 
In  1916,  the  bank  amalgamated  with  the  Pun;jab  Banking  company  and 
Delhi  and  London  Bank,  and  in  1917  with  the  Bank  of  Rangoon.  The 
Oudh  Comrjercial  Bank  was  established  in  1881,  The  head  office  is 
at  Fyzabad  with  two  branches.  The  paid-up  capital  is  five  lakhs 
of  rupees. 

Since  the  beginning  of  the  present  century,  the  Indian 
Joint  Stock  Banks  ha,ve  gro?irn  by  leaps  and  bounds.  The  following 
table*  will  give  an  idea  of  the  extension  of  Joint  Stock  banking: 


Bank 

Hea.d 
Office  . 

Paid  up 
Capital , 

Date  of 
Registration, 

Bank  of  India 

Bombay 

50  lakhs 

1906 

Indian  Bank 

Madras 

10  " 

1907 

Punjab  Sindh  Bank 

Amritsar 

3 ” 

1908 

Bharat  Nat’l  Bank 

Delhi 

4 " 

1908 

Bombay  Merchants  Bank 

Bombay 

15  " 

1909 

Cent ran  Bank  of  India 

Bombay 

35  " 

1911 

Bank  of  Mysore 

Bangalore 

10  ” 

1913 

Bank  of  Norther  India 

Rawalpindi 

1 »' 

1908 

Cooperative  Hindusthan 
Bank 

Cal cutta 

1 " 

1908 

* Shirras,  G.F.  - Indian  Finance  and  Banking,  p.  384. 


r 


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- /. V -*^r  * ■;,  4 iVr '5,^^  :'  ‘W  fl5^eO^ 


There  are,  in  all,  68  Indian  Joint  Stock  Banks  with  199  branches. 
The  importance  of  43  of  them  in  the  banking  system  may  be  estima- 
'ted  from  the  following  data*.  They  have  'cesn  divided  into 
two  classes  according  to  the  amount  of  business. 

(in  lakhs  of  rupees) 


Class  I 
(l8  banks ) 

Claus  II 
(S5  banks) 

" ‘ ' YoYa’l 

Paid  up  capital 

304 

44 

348 

Deposits 

3117 

99 

3216 

Cash  balance 

765 

20 

785 

The  banking  and  loan  companies  included  in  the  Joint 
Stock  system  and  registered  under  the  companies  act  in  1914-15 
numbered  574  and  their  paid  up  capital  amounted  to  Rs.  79,875,509. 
The  figures  in  1917-18  were  485  and  Rs .101 , 949, 000  respectively, 
i The  number  declined  in  1915-16  due  to  failure  of  many  banks. 

There  are  hundreds  of  petty  banlci ng  and  lending  establishments 
included  under  banking  and  loan  companies.  The  institutions 
carrying  on  operations  on  a considerable  scale  are  very  few  in 
number.  For  a better  understanding  Indian  Joint  Stock  Banks 
- may  be  classified  into  four  groups  according  to  the  amount  of 


* Shirr as,  G.  F.  - Indisu  Finance  and  Banking  ,p.  364. 


-yr-’. 


fi^’' 


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( -"  ’'■  ■ ".  ‘■'•'ir  ■ • ' •..'  ‘‘^i  "'  ■"-'' -s-  ■' '■  J 

' . ■;£ ■ 1^1  ••• 

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17 

their  capital.  Their  position  in  1918  is  shown  in  the  following 
table* ; 


(in  lakhs  cf  rupees) 


No.  of 
banks . 

Paid  up 
capital . 

Reserve 
8c  Rest 

Deposits 

Cash 

balance 

l)  Banks  with 
capital  re- 

serve amount- 
ing to  Rs  .S, 

000,000  and 

above  ■ — 8 

35605 

13579 

377364 

87292 

S)  Banks  with 
capital  ^ re- 
serve between 
Rs  .20  and  10 
lakhs  — 5 

4871 

2136 

23027 

5854 

3)  Banks  with 
capital  8c  re- 
serve between 
Rs . 10  and  5 
lakhs  — 6 

5159 

644 

5557 

1712 

4)  Banks  with 
capital  & re- 
serve between 
Rs . 5 and  1 
lakhs  — 28 

4865 

1443 

13635 

3690 

Total  - 48 

44810 

18002 

421463 

96648 

Indian  Joint  Stock 

; Banking 

0 

is  still  in 

its  infancy 

and 

has  yet  to  become  strong  and  sound  like  the  Euroj^ean  banks  of 


♦Kale,V.G.  — Indian  Finance,  p,568. 


f.  i 


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18 


longer  experience.  Nor  are  all  the  Joint  Stock  Banks  managed 
by  Indians.  The  largest  of  them,  na-mely,  the  Alliance  Bank  of 
Simla,  which  has  absorbed  se</eral  other  banks,  and  the  Allahabad 
Bank  as  well  as  a few  others  are  under  Eurox^ean  management. 

While  Joint  Stock  banking  was  progressing  satisfactorily,  it  was 
checked  suddenly  by  the  crisis  in  I'^IB,  when  a number  of  banks 
collapsed.  The  failure  caused  ruin  and  hardships  to  many  people, 
but  it  contributed  a wholesome  and  much-needed  lesson,  as  it 
exposed  the  unsafe  condition  of  many  apparently  prosperous  concerns. 

Banks  of  the  fourth  class  are  the  private  Indian  indi- 

r 

genous  banking  and  quasi-banking  firms.  Some  of  them  are  of 
large  means  and  connections.  In  this  class,  the  agricultural, 
industrial  and  land  and  mortgage  banks  may  be  included.  In 
addition  to  these,  the  money  lenders  like  the  Chetties,  Banias, 
and  the  Shroffs  etc.  are  to  be  considered.  These  banking  firms 
and  money  lenders  are  very  important  from  the  point  of  view  of  the 
Indian  population.  Private  bankers  and  Shroffs  flourished  in 
India  long  before  Joint  Stock  Banks  were  ever  thought  of  and  it 
seems  likely  that  they  will  continue  to  thrive  for  some  very  con- 
siderable time  to  come. 

In  the  beginning  of  the  chapter  much  space  was  given  to 
the  indigenous  banking  firms  of  India  and  the  Indian  money-lenders, 

’ To  avoid  repetition,  the  remaining  pages  will  be  devoted  to  con- 
sideration of  two  types  of  banks  which  are  now  beginning  to  appear 
in  India.  They  are  the  agricultural  banks  and  the  industrial 
banks.  Both  are  private  enterprises,  and  hence  included  in  the 
fourth  class  of  Indian  banks. 


11 


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T9 

Practically  speaking,  there  are  no  land  banks  or  agri- 
cultural banks  in  India  like  those  in  other  countries.  The  land 
holders  of  India  obtain  loans  by  mortaging  their  lands  to  money- 
lenders at  very  high  rates  of  interest,  and  cultivators  obtain 
advances  from  the  village ’shroff ’ for  the  current  expenses  of  agri- 
culture. The  government  loans  money  to  cultivators  to  a certain 
extent,  but  government  loans  are  not  popular  and  do  not  meet  the 
smallest  fraction  of  the  needs  of  the  people.  The  indebtedness 
of  the  Indian  peasants  is  overwhelming  and  attempts  made  to  re- 
lieve it  have  mostly  failed.  If  there  were  banks  like  the 
agricultural  banks  of  France  and  other  countries,  the  peasants’ 
condition  would  be  vastly  improved.  But  he  still  has  to  rely, 
where  there  is  no  co-operative  credit  societies  --  and  these  are 
too  few  in  view  of  the  large  population  of  the  country  — on  the 
old  credit  machinery,  viz.,  the  money-lenders  who  charge  high 
rates  for  money. 

Fortunately,  the  Indian  public  is  opposed  to  this  sort  of 
procedure  and  is  trving  to  establish  agricultural  banks  in  imita- 
tion of  the  agricultural  banks  of  Egvpt . There  are  at  present 
quite  a number  of  co-operative  credit  societies  to  aid  agricultu- 
rists, but  their  number  is  so  limited  that  they  afford  but  little 
help  in  the  solution  of  the  problem.  These  co-operative  credit 
societies  are  mainly  intended  to  assist  agriculturists.  The 
chief  features  they  include  are:  (l)  limitation  of  area;  (s)  low 
shares;  (3)  permanent  indivisible  resean/e  fund;  (4)  unlimited 
liability  of  members;  (s)  loans  only  for  productive  or  provident 
purposes;  (g)  loans  only  to  members;  (*^)  credit  for  relatively. 


Muftifiw  I -I  aaiM»<'f»<«i’. 


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T '-  .,  ■ ■ * ' '1  ♦'  V'  ''•;X.<>'^|*-;  • 

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• * ► ' 4 ; * 4 ■ ' ',  ■"/'.■  >h,»,1  ^ * r'’  ' 'i'l '■ -*t.  '.*?■  *,  L ^ ^ 

^6.;  ' , • 4'  " '‘-''''  . ,♦  '';,'-£4^ 

■afi'  ' ...  ''  IX  - ^ ' • ' -,  ' . ^ 


I "JH 


aI: 


I 


' ..,'  ■'  u ^ ^ ,|jp 

• '■  ••  “*  '.  ■ ‘ nr-  '■,.  ^ , '^4t  .“‘'^x■•'!,^p  .. 


■a\£&6;->f.*>J6*  ? .*.  ' • ■•••.;  .' ...i,\i’>  ,'e  ' . rtr.->.ite^»!fi^ 


30 


long  period  with  facilities  for  repayment  by  installments;  (s) 
absence  of  profit  seeking. 

These  features  of  the  village  bank  not  OifLy  supply  the 
cultivator  with  cheap  credit  but  also  teach  him  to  combine  with 
his  fellows  for  common  interest,  to  practice  thrift,  to  make  pro- 
ductive use  of  lis  resources,  and  to  build  up  his  economic  pros- 
perity on  the  foundation  of  self-help.  Wany  people,  who  appre- 
ciate the  importance  of  the  co-operative  societies  and  who  are 
working  to  help  on  their  progress,  feel  that  the  government  must 
directly  encourage  the  establishment  of  mortgage,  land,  and  agri- 
cultural barks,  and  must,  for  this  purpose,  place  funds  at  the 
dispossl  of  such  banking  enterprises.  Millions  of  India’s 
Re  serve  which  are  lent  in  England,  may  be  made  available  in  India,. 

In  Fra.nce,  Japan,  America,  and  other  countries,  such  state  help 
is  given  to  agriculturists  and  the  example  must  be  followed  in 
India . 

In  industry  the  same  need  has  been  felt  as  in  agricul- 
ture. As  the  other  classes  of  banks  can  not  afford  to  tie  up 
their  funds  in  the  ordina.ry  securities  of  new  industrial  concerns, 
there  must  be  some  industrial  banks  to  take  their  place.  India 
has  already  seen  a few  such  industrial  banks  and  in  future  she 
hopes  tc  have  many.  Messrs.  Tata,  Sons  and  Company,  an  Indian 
firm,  have  taken  the  les.d  in  starting  an  industrial  bank.  The 
Tata  Industrial  Bank  was  established  in  1917  with  an  authorized 
capital  of  nine  crores  of  rupees.  In  the  same  year  Karnani  In- 
dustrial Bank  of  Calcutta  with  a ca.pital  of  six  crores  of  rupees, 
and  the  Calcutta  Industrial  Bank  with  a capital  of  two  crores 
of  rupees  were  also  established.  The  progress  of  these  industrial 


ik\  r't-??  c?i' ) ft ‘'/»*^.  nci®  J:t ^4ial.i 

1^  ^ A ^ _ •k.  -S  i *(»■  w 


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I.  / . 


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\\'y 


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I'Vvi'- 


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It'^l  • I ._  ' ,.  »■  : ■«.■•,*  IM  i «,■- 


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.ar 


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21 


banlcs  at  present  is  being'  watched  with  the  keenest  interest. 

These  industrial  banks  were  started  without  any  govern- 
assistance,  and  though  the  govsrrjnent  must  help  industries  directly 
in  a variety  of  ways,  it  is  best  that  industrial  banks  should 
multiply  so  a.s  to  be  able  to  stimuls-te  the  development  of  indus- 
tries through  private  agency.  The  financing  of  industries  could 
certainly  be  better  done  by  private  barks  strongly  supported  and 
supervised  by  the  state.  Many  such  banks  are  needed  for  provid.ing 
adequate  funds  for  new  ventures.  The  business  of  industrial 
banks  is,  of  course,  full  of  risks,  s.nd  special  precautions  have 
to  be  taken  'ey  them  in  laying  out  their  funds. 

It  will  be  seen  now  that  the  Indian  Banicing  System  is 
unlike  that  of  any  other  country.  It  is  unique  in  its  develop- 
ment, and  becirs  little  rela.tion  to  other  systems,  with  the  excep- 
tion of  the  Presidency  banks,  which  are  to  a certain  extent,  like 
the  Banlc  of  England.  The  following  table, No.  I shows  the  re- 
lative strength  of  the  three  classes  of  Indian  Banks.  The  fourth 
class  has  been  omitted,  because  data  from  the  priva,te  and  the 
quasi-private  banks  are  not  available.  Table  Nc.2  is  also  iri^ 
teresting  as  it  shows  the  present  development  of  banicing  in  India. 

Ta'cle  No,  I.*  (in  crores  of  rupees) 


Paid  up 

Deposit 

Percentage 

capital 

of  cash  to  lia 

Presidency  Banks  4 

76 

45 

Exchange  Banks  28^ 

53^ 

Indian  Joint  Stock  Bks , 3 

32 

24 

^Total  paid  up  capital  . '^Indian  portion. 

^Calculated  on  the  deposits  and  cash  balance  in  India. 


♦ Shirras,G,P.  - Indian  Fianance  and  Banking  , p366. 


^'1 


, v:li?  ^ V ^ ‘Mdtfti 

• ‘ 4'..  ■■-  ' ’ ■ *■■  ' 

^ Vi.,  vvt.  ■ ’ '*  y ,4#*i  !•'  " * ^ ^ 


if ■« ) .,  > V '• 


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' '*  * ' ’'  yf'‘'’'*y  ' ■ •■  ' ■ ■ V s*’-iii^L'^’'’' 

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^^r»JB^*rayQi  I,  jMta 


!?'k  , It.  , 7'’lCT^''y™fiWlfell  ' ,.,.Uj"i;«[.i-., 


22 


Table  No.  2.* 


1913  1914  1915  1916  1917 


Number  of  banks 
Number  of  branches 

Capital  & Reserves  (in 
crores  of  rupees) 

56 

56 

59 

61 

55 

304 

a.  Presidency'-  banks 

7 

8 

7 

7 

7 

b.  Exchange  banks  (tota.l)5'? 

c.  Indian^ Joint  Stock 

55 

55 

57 

49 

banks 

Deposits  (in  crores  of 
rupees ) 

4 

4 

5 

5 

5 

a.  Presidency/  banks 

b.  Exchange  banks  (in 

India) 

c.  Indian  Joint  stock 

42 

46 

43 

50 

76 

31 

30 

34 

38 

53 

banks 

Cash  to  liabilities  on 
deposits  (percentage) 

24 

18 

19 

26 

32 

a.  Presidency  banks 

b.  Exchanpe  banks  (in 

38 

46 

34 

35 

45 

India  only) 

c.  Indian  Joint  Stock 

19 

28 

23 

27 

63 

banks 

18 

21 

22 

24 

24 

♦ Shirr=LS,  G.F.  - Indian  Finance  and 

Banking,  p. 

339. 

1916 


7 

54 


80 

62 


28 

26 


r 


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■ ■ . I :'  V -i'  ••.i^-'''':;^;i%&':l®j^ 


23 


Chapter  III, 

The  Function  of  Indian  Banks, 

The  utility  of  hanking  has  been  airply  justified  by 
numerous  writers  on  political  economy,  perhaps  to  a greater  degree 
than  by  authors  who  are  actually  in  the  profession.  Therefore 
nothing  new  about  the  utility  of  a bank  is  going  to  be  considered 
here,  but  rather  the  character  of  business  which  it  nie-y  have  in 
a particular  country.  Fund &imen tally,  banks  are  to  provide  for 

the  lea^dlng  wants  of  a,  nation,  which  are,  first,  loans  of  a. 
considerable  amount,  required  by  individuals  embarking  in  enter- 
prises beyond  their  own  means;  and,  second,  the  temporary  employ- 
ment of  money  which  is  not  required  by  the  owner  for  immediate  use. 
To  provide  for  this  primary  and  indispensable  function,  some 
agency  is  called  for;  and  it  is  this  which  gi^'-es  rise  to  the 
business  of  modern  banking.  In  India  the  same  banking  business 
is  in  evidence,  but  the  character  of  it  is  somewhat  different, 
and  it  is  this  difference  w^hch  is  taken  up  here. 

Of  the  three  Presidency  Banks  mentioned  before,  the 
Bank  of  Bengal  is  03?’  far  the  oldest,  having  commenced  business  in 
1605,  It  was  followed  b^/-  the  Ba,nk  of  Bombay  in  1640,  and  by 
the  Bank  of  lia.dras  in  1643.  The  charters  which  have  authorized 
the  establishment  of  these  banks  place  some  restrictions  on  their 
business  transactions,  and  it  will  be  necessa.ry  to  know  just  what 
these  restrictions  are,  if  the  banks ’ business  is  to  be  clearly 
understood.  In  the  case  of  the  Bank  of  Bengal,  it  is  laid  down 
that  one  lakh  of  rupees  is  to  be  the  maximum  arriount  of  stock  which 


!-  , J Ui'"V  'i  I'l  ' ••  ■'!  ‘ ‘ < i'^ 


TH 


\aam0  , , ' ■ ‘ * jM- 

. ‘Wi'.".  eOT> 

’"A  '-■ 

■>■'  c ri  i 'Vsr.  :t  ^■■i>'v t 
....  .,'' . 


'•  > 


>nav  , 


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> V 2*.0  ' A i 'V ' l%-  < 

' wt.,  'V.-,  ■ ■ '■  ’'^'  ’/i 

» . ■, ' . i V V'  i >*^-,*-  , - ' ' '/v.  , ' ^ <>*"'■■'  *' 

ttea^i-  I < ■>,  •*  *11^ 

P^)if  ^t!  : fi  --  f'  N t'W  ii|W'x 

■ ■ ' ..il>  .■•  A * 


m 


' ^ ^''0^  St 

6^-'-^--)Vt  ‘{X^  f‘-'V  ''  ■ ,'^3'vf.y<r  'll  ty^  • u tj'y ' f.'  ^ 


’ • '.i  o«^.  - ' 


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24 


any  one  proprietor  may  hold;  and  one  lakh,  and  5 lakhs  of  rupees 
are  to  he  the  maximum  amount  which  can  be  advanced  to  any  indivi- 
dual and  to  the  government  respectively.  The  idea,  of  this  res- 
triction on  a.dvances  to  the  government  is  presumably  borrowed  from 
the  Bank  of  England’s  charter  of  1695,  which  prohibited  the  bank 
from  making  advances  to  the  government  without  the  permission  of 
parliament.  It  is  also  laid  down  that  the  bank’s  ra.te  of  interest 
is  to  be  limited  to  a maximum  of  12  per  cent,  just  as  the  Bark  of 
England’s  rate  until  1839  was  limited  to  5 per  cent.  The  charter 
further  provides  that,  (l)  a cash  reserve  of  at  les.st  one-third 
of  the  outstanding  liabilities  payable  on  demand  should  be  kept; 

(2)  the  total  liabilities  of  the  Bank  including  deposits,  note 
issues  etc.  are  not  to  exceed  the  Bark’s  ca.pital  of  50  lakhs  of 
rupees;  (3)  note  issue  up  tc  2 crores  of  rupees  or  four  times  the 
Bank’s  capita,!  is  permitted.;  (4)  the  limit  of  the  cash  reserve  to 
other  liabilities  is  to  be  one-fourth;  and  (b)  the  bank  is  prohi- 
bited from  financing  the  exprot  and  import  trades.*  This  last 
restriction  definitely  fixes  the  bank’s  operation  of  business 
inside  the  country,  of  which  .mention  is  to  be  made  later. 

The  other  Presidency  banks  also  share  the  same  restric- 
tions on  their  business  with  slight  variations.  Under  the  pro- 
vision of  the  charter,  the  Bank  of  Bombay  is  prohibited  from  en- 
gaging^any  kind  of  business  except  the  kind  specified,  viz.r  \1) 
the  discounting  of  negotiable  securities;  (2)  the  keepir.g  of  cash 
accounts;  (3)  buying  and  selling  of  bills  of  exchange  payable  in 


♦ Cooke,  C.  N.  — - Banking  in  India  , p.  102 




\r  ’ “*  .1.^  '^'  ■ ■,  • * ' '^">  . •*  . ‘ 


P .-^'U  tA.ii >;u 

T- 


,-uU 


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I'l  . ^ . -1.  rt  t>>4»t’' Idis  jtmilii'' 

■«  ' ■ ■ '"■T^*  ■ ■ '''■^'"s>'‘'V  . , V -i  ,iir  Vil  ' • '*  '■  ''  ' 


!.t 


f 


J A \ r,  ’ w '..f  , 5*1  ■ ,'flif>hk^l^'*X 

‘ --  ''  ■ -d:''- 

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t'*U*.*.^  :',i^  * .*iawi;i  '^ -•  ! j f'l  Ztiiti! 

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•)’  ,’••  ■ * i’  ' :ri5fi;;te 

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; rfjf  Xt 


. Am 


f-.':  siuaiif'^'  ' i~0\  ' /■,.  - '■'  ' , ‘■'\  ' 

.V  j-  -*'X' ^ S «o.|r»iv.X 

- . i**’‘  /(/  ' l.i  * '^.  V-.  ',.1 

,.  / -r ) , j..  *_.  *,v V-'..'  ...>''i'l'.  '^^'li  i";  V;i F^.. 

\ i / 4 * 


v,'':-;- 


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' If  i *'  ^ ^ »4»<* .f • u-'iii},  V 

• m’  * * .J\!.  ' •;...  .’  V .!''•*'  -;■"/'  c..-^  ..  . . ■*  '.  < .'jK  «•-  ■.•' 

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'Li  I 


25 


India;  (4)  the  lending  of  money  on  short  notes;  (5)  buying  and 
selling  of  bullion;  (g)  receiving  of  deposits;  (*7)  issuing  and 
circulating  ba-uk  post  bills;  and  (s)  selling  property  or  securities 
deposited  in  the  bank  as  security  for  loans  and  not  redeemed,* 

The  bank  is  further  obliged  to  keep  cash  in  its  vaults  equal  to 
at  least  one-fourth  of  all  claims  outstanding  against  it  and 
payable  on  demand.  For  the  Bank  of  Madras  similar  provisions 
exist,  and,  therefore,  they  need  not  be  enumerated. 

From  the  above  limitations  it  may  be  clearly  perceived 
that  the  Presidency  Banks  are  debarred  from,  entering  into  any 
other  enterprise  of  business  activities  which  they  might  be  able 
to  carry  on  successfully''.  For  a strict  supervision  of  the  barks, 
the  government  is  entitled  to  call  for  any  information  touching 
the  affairs  of  the  banks  and  the  production  of  any  documents  re- 
lative thereto,  and  may  also  require  the  publication  of  such 
statements  on  assets  and  liabilities  at  such  intervals  and  in 
such  form  and  m.anner  as  it  m.ay  determine. 

Until  the  year  1662,  the  Presidency;-  Banks  had  the  right 
to  issue  notes,  but  in  that  year  this  privilege  was  withdrawn  and 
to  compensate  the  banks  for  being  deprived  of  this  right,  the 
government  decided  to  deposit  the  whole  of  its  balances  at  the 
Presidency  tow'ns  with  the  banks.  This  practice  held  good  until 
Ib'TG,  when  the  independent  treasuries  v;ere  formed;  but  since  that 
yea.r  the  government  balances,  which  a.re  payable  at  call,  have  been 
maintained  at  a figure  only  sufficient  to  meet  the  demand  of  the 


* Cooke,  C.  N.  — Banking  in  India,  p.l05. 


'A 


.....  - yo.‘;  ''®Kv;i'i^'i'‘“.i^4’i-4X J 

'v  .*■:  • • , 4 '•'■  i*  ’.,  , ,-•'  Q <••;■.  , ^ ■ ■\;  ._.  . .* * ■■  Vot 

' ■ ' ^-  ■ > -;y^^  . V>  . r| 


iv,  i'i' ' . 

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. jl'Cytl,' - i’c("  ‘.'i;  V'.  •ir'^-Af'  :»■ 

|S-'  ''*'l'T  a-  ■’  ■'  ' 1 ■*  ■ . ■ ••'  y - '."Vr  ' f 

■ ‘v-  /.  ^ M'U'  ;.•/-, 7;.  « .■•  -t. 

r7*'  '■  ' ’•  r . I.  AA.  . ' ' i*/»  7 f ^ v • 


4i 


.•M.'  ,'  -W’  ' fr%C’' 


V'  •- ' '■■  '■  v:  ‘ 


...  


>-0  I^r,: 


,c.«? 


26 

government  and  to  compensate  the  banks  in  part  for  the  work  of 
keeping  the  accounts.  There  is  no  definite  undertaking  on  the 
part  of  the  government  to  keep  an^^’  balance  with  the  barks  either 
at  the  head  offices  or  branches,  but  there  is  a stipulation  that 
in  the  event  of  the  balance  at  the  head  office  of  each  bank  falling 
below  a certain  figure  the  government  will  pay  interest  on  the 
deficit.  This  relation  between  the  government  and  the  Presidency 
banks  in  respect  to  the  holding  of  balances  is  partly  regulated 
by  agreements  with  the  banks. 

In  order  to  assist  the  government  in  its  attempts  to 
encourage  the  use  of  currency  notes  throughout  India,  the  banks 
have  recently  undertaken  to  issue  and  to  encash  freely  for  the 
public  on  behalf  of  the  government  the  universal  currency  notes 
at  most  of  their  branches;  and,  in  consideration  of  their  having- 
undertaken  this  work  the  government  has  agreed  to  maintain  certain 
mirdmum  balances  at  such  bra.nches  so  long  as  they  are  entrusted 
with  this  work. 

In  the  year  1876,  the  government  passed  the  Presidency 
Banks  Act.  Under  the  provision  of  this  Act  all  the  three  ba.nks 
are  required  to  operate  their  business.  The  vs-riou.s  types  of 
business  which  the  banks  may  transact  are  set  dov/n  and  described 
in  this  Act.  Briefly  stated  the  main  forms  of  business  which 
the  banks  may  engage  in  are  as  follows*: 

1,  Investing  of  money  in  any  securities  of  the  government 

of  India  or  of  the  United  Kingdom  of  Gt . Britain  and 
Ireland,  the  stock  or  debenture  of,  or  shares  in 


* The  Indian  Year  Book,  1920, p,  271-272. 


. .1  '.i  W'-; '4t  : «i<*7 -<>' 

> ^ V v‘^-'  ' ■•  ' ' ■:•'  * >«  ■ 

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■ " ' ■'■  • •■•'  i ■ ' if 

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j ■'^"  ( ' * ^ » - " ' '^'-'•M  %■'  l3P 

' '■'  I C^'  .'  /"  X';' j 

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s 


•■  ' . ■ • ';.  »<.  ..  \ 


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. t - Ti.»  r 1- ■ ‘ ■ ' ”"  ■'''  f'.  ilf'j 

.,.  ..  \ ;■'-  nf>\ 

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^.  f 4'fciR^ 


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» 4(^,.f';r^:  » ■•  ..k  j,  :/t  '■*  -i 

f‘'''  < ' ’ •'“  ,'  " - ’ ■■■ 

•'w;4.:^’'‘‘e\':  “;  v. :'-x  ,>  ,.fti  , /Isf'  .'•  ■ <f;  f ».  ^%r..;t.»i>/i.v, ,,  , 

^ ■■  'f  ' ■ ' ' ^ ‘ 

-'  '<  ‘‘Ii,''  >» 

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/ A Ftwi^V  ^ 


n.i. 


ii  *« 


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A >''  yflflBB’  ;,,y,  *1 


f*  •* 


27 

railways  bearing'  a government  guarantee  in  respect  to 
interest  and  the  debenture,  and  in  securities  of  any 
municipal  body  or  Port  Trust  in  India  or  of  the 
Bombay  Improvement  Trust,  and  of  altering,  converting 
and  transposing  of  such  investments. 

2.  Advancing  of  money  against  any  of  the  securities 
specified  above  or  against  bullion  of  gold  and  silver 
or  other  goods  or  the  documents  of  title  which  are 
deposited  with  or  assigned  to  the  bank  a,s  security. 

3.  Advancing  of  money  against  accepted  bills  of  exchange 
and  promissory  notes. 

4.  Drawing:,  discounting,  buying  and  selling  of  bills  of 
exchange  and  other  negotiable  securities  payable  in  India 

or  Ceylon. 

5 . Re ce i vi ng  deposits. 

6.  Receiving  securities  for  ss.fe  custody  and  realisa.tion 
interest  etc. 

7.  Buying  and  selling  gold  and  silver  whether  coined  or 
uncoined . 

8.  Transacting  pecuniary  agency  business  on  commission. 

The  principal  restrictions*  placed  on  the  business  of  the  banks 
are  as  follows: 

1.  The  drawing,  discounting,  buying  and  selling  bills  of 
exchange  and  other  negotiable  securities  are  confined 

* Keynes,  J,  M.  — Indian  Currency  and  Finance,  p.201. 


’ 'f  T 


: v-T  ‘^iyryv 


^iC-\ViJ ; ba.  tvfe/>^IJ^.>.-,Sn.«  , i •<  *'>.?  - 'ader  ^ ‘'ij'  ■■., ;.  **;f*(».  T 

: .'^  • ■^v': ' >•> '^vflnnii  ' . \' * ."Mki  ' ■'^t' 


i<(  '*■ 


'tJ  : t rM^i"'  I k.  t »?0s;,.-  /’f 


?hl>-*vV/;vr.  . v4fi;.vAlo' ‘-.^  >*tO 

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i.  ’ ' ■<.: 


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■ipi?  ;*  i 4 .T-.  I 'i, ' ' * y 


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"^  ' — '‘^ ' " ‘ '*  ^ ' 

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-ilC'U4^,..'i4fe.  A.'.i  tf  vt.  -flfTt; 

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% •■.«;.  5 tv  , -3j>  • .V;’  _ 

■ >. ; «'V>..-.;  • 'i ' , • ■ =Ra-  '.;'•  >’  .•? 'i'.]^  ' ■ '.  .■•«?.■  J 

, ■ • • *■•  .>«P[  . '5.,  'ViV'ij^  •’■  ■■■’^;  .V  1 6'%'d'iuyl 


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iitz\^A^(t^  0gT|j:yf^>r'  J 

Ij-sfiU  5’ao^  '».*iij  1 ''  '■'''  *' 


tiT^'  ■(••'■■'■■.  -,i;'  'i^ji^iMiit 

^]iL^i.m‘-‘«‘'-  y I.  • ^ «■  AT.^. 


I*;  y yptypf»  1 1 


28 

to  bills  and  securities  payable  in  India  and  Ceylon. 

2,  Loans-  or  advances  upon  mortgage  or  in  any  other  manner 
upon  the  security  of  any  immovable  property  or  the 
documents  of  title  relating  thereto  are  expressly 
prohibited, 

3,  The  amount  which  may  be  advanced  to  any  individual  or 
partnership  by  way  of  discount  or  on  personal  security 
is  li'mited  to  an  amount  prescribed  in  the  by-la-ws  of 
the  ba.nks , such  by-laws  having  previously  been  approved 
by  the  government. 

4.  Loans  or  advances  can  not  be  granted  for  a longer 
period  than  six  months  at  a time. 

5.  Discounts  can  not  be  made,  nor  advances  on  personal 
security  be  given,  unless  such  discounts  or  advances 
carry  with  them  the  several  responsibilities  of  at  least 
two  persons  or  firms  not  connected  with  each  other  in 
general  partnership. 

From  the  foregoing  limitations  it  is  not  difficult  to 
see  how  much  these  Presidency  Banks  are  handicapped  in  business 
transactions  outside  of  India.  In  order  to  remedy  the  situation 
various  requests  have  been  m.ade  to  the  government  by  the  banka  to 
have  certain  of  these  restrictions  withdrawn,  ps^rticularly  those 
referred  to  under  Nos.  I and  2 which  have  effectually  prevented 
the  banks  from,  doing  anything  in  the  nature  of  exchange  business 
and  from  having  access  to  the  London  money  market  for  borrowing 
purposes,  but  these  have  been  of  no  avail,  a,nd  the  suggestions 


‘ ’ *’■7.  '-.  A - T 

«<lr4iu*  trJ.  - . : -a;4tJi6Ji<t V^wrBtUlO 


w 


^‘  ■ ’•  .:  '’•:*^,‘.'''Vif':  , ■*  \ 


4C- 


tj'  ■•  5’ 

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p..  ■ ■ ,■  V • •,  ., \^  ; ■'  >o>.^,^.  , .'  iT''‘  .’’i 


Vi^.  , .5 


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.* . 


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:-iW 


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®i  i ^ '■-  *' 


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■f/  .. 


j!  •?.  ’ S:  x/'  •'■'•'.  ^ ‘ -i'V,-.:  ,• 

ft  ■ --  * 


^ 4 


: V . i.':  f.,<^  “ivii  :ifi 

t ■'P^rSif 


Kf' 


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' V ro  .;.'  ‘-''w'vii  , . " ^ ^ -mt^' 


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'J  J.  ' 4‘-  4. ' ■ ■’  ‘4^|V'''.  a^  "'  d 

. 'f  - “OlfWf  • '!»/»  •.’A'.'  * _j*_»iik ,t  '4  J^i.i,««>.U  fii.u  it.  t 


39 


have  been  definitely  negatived. 

The  prohibition  of  the  Presidencv  Banks  from  dealing  in 
foreign  exchange  business,  on  the  other  hand,  has  effected  a 
fruitful  result.  It  has  established  thereby  a close  connection 
between  them  and  the  indigenous  money  market  of  India.  The  banks 
being  precluded  from  speculative  business  have  been  obliged  to 
finance  the  internal  trade  of  India  through  their  purchase  of 
internal  bills  of  exchange  known  generally  as  'hundies'.  It  must 
not  be  thought,  however,  that  the  financing  by  the  Presidency 
Banks  of  internal  tr?de  and  the  assistance  given  by  them  to  Ind.ian 
financiers  and  merchants  is  limited  to  their  ’hundi ' business, 

P.  substantial  portion  of  the  cash  credits  gi^'-en  by  the  Presidency 
Banks  represent  advances  made  directly  against  produce,  hypothe- 
ce.ted  to  the  ba-nk  by  Indian  traders.  Again,  loans  against  the 
government  and  other  approved  securities  are  frequently  made  to 
Indian  concerns.  But,  the  banks’  ’hundi’  business  is  important, 
and  it  is  ?;here  they  impinge  directly  upon  the  market.  The 
operation  of  the  ’hundi’  business  by  the  three  Presidency  Banks 
do  not  differ  materially  in  each  with  the  exception  that  the  ’hundi’ 
rate  of  the  Bank  of  Madras  is  go^^'erned  to  a laroe  extent  by  those 
of  Bengal  and  Bombay.  In  order  to  understand  the  ’hundi’  business 
a very  short  and  generalized  account  is  given  with  the  object  of 
showing  the  working-  of  the  ’shroff’  system  in  its  relation  to  the 
Presidency  Banks. 

The  people  with  whom  the  ba.rks  deal  directly  are  for 
the  most  part  large  ’shroffs’  of  good  standing  in  the  principal 
cities.  These  men  operate  with  their  own  capital,  and  generally 

-I  .1  I.-. 


i 


S' 

'*•  fV  ■ 

t r,  ■ 

. -k  ’.  • ■ ^ ' /m 


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isi  n 


4 


ar'Sjif.,, . * • ....  • . ■ ■’■•  ‘Ti  • ./‘  vn, 

iV'iiSKtS  f|.  ■'♦'fe 

’’  jj||K'  ’ ’ I'  ’-•  - * 

^ '.  *;*■  rs  (*♦'  ’'•415^ I ^'w.  r:;-  ,W-t 

I '>’■■-..  , • 

K V , * .,  ji  ■ 


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fi4- 


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^ '■•  '^’'  ; •-.  ' "•-  - '.,  CSw‘.  ♦‘,'-iS 


• A. 


. ’ Uwa 


u •..  . ...  ■■  . & ' 

- i’A-.  *^vrV  -T  ..<a-xr  *«'  ■ c .-‘uv; 

■ ^-7  s . i'r  , 

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f.  ♦ 


fi  I 


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• •: . • i . . ’ : ...  ’ V^,<,  1 * .-4 1 ' : = * ’■ 

‘ ,.  .-•  .•  ’•  ,*«4-  */  • 1 ■•'"  .s 


> ‘m 


Vj  ,. swi.*  - astir  ,i^ 

■ ■ • , V «'/•?'()'."■  *■.♦  *“  M * . . • •.  ■i/.„F;.‘  % 

. . ii  . ^CBImcV 

’''i 


«»> X.V.  CI'.V x,l  ’ v‘»*; , 

• ' ' vi  ,'■'’  .■''  '■ 

‘ . , . V,  ■ .'  ''\  *.  * -*•'/  . vV.  ■ ' ’ * ^^ 

- til  A7HI  ’’::r-.^>-t  ; /•; 

f ••,  , ,'  . ;.  •>/■>  ./;•*'  ,"^■^^•'^0'  '•:'^'“'-'f  r#'  ‘ 

r ' \ Tji:i-:  viLiA«xii  iT  * fii  -jt  j 5'i.  .■  i)c  iri.  . . * a ’ 


'( 


30 


speaking,  it  is  only  when  they  have  laid  out  all  their  available 
capital  in  purchasing  the  'hundiss'  or  hills  of  other  ’shroffs’ 
(usually  smaJler)  ths.t  they  come  to  the  Presidency  Banks.  The 
’shroffs’  whose  ’hundies’  the  larger  ’shroffs’  have  purchased, 
have  also  similarly  financed  other  and  still  smaller  ’shroffs ’and 
so  on  until  the  villa.ge  Bania.s,  or  grain  dealer  or  goldsmiths  are 
reached.  For  instance,  ’shroff  A at  Dacca  may  purchase  a iDill 
drawn  by  a grain  deader  upan  a Bombay  merchant.  A may  endorse 
and  sell  it  to  B,  a large  ’shroff’  at  Calcutta,  who  sells  it  to 
the  Presidency  Bank,  which  sends  it  to  their  Bom.bay  agency  for 
collection.  The  bills  thus  created  are  of  two  kinds:  One  , a 
pure  finance  bill,  generally  known  as  ’hand  bill’  the  other  a 
’trade  bill’  so  called  because  drawn  against  produce, 

Spee.king  very  generall^^  it  may  be  said  that  the  banks’ 
rea,l  security  in  the  matter  of  purcha.sirg  or  rediscounting  bills 
is  the  personal  standing  of  the  drawee  or  endorser  or  acceptor. 

The  banks  have  an  elaborate  a,nd  very  efficient  system  of  limits 
whereby  the  amount  of  bills  discounted  for  each  ’shroff’  is  watched 
carefully.  To  put  it  briefly,  the  system  is  as  follows:  ’Shroff’ 

A is  given  in  the  ba.nk’s  register  a limit  of,  say  10  lakhs  of 
rupees,  and  at  the  same  time  the  names  of  the  drawers  of  the  bills 
purchased  from  him  by  the  ba.nk  are  watched.  The  bank  may  have 
purchased  from  A,  say  8 lakhs  of  bills,  the  drawers  of  w^hich  are 
B,C,D,E,  etc.  It  is  observed  that  ’shroff’  A has  been  purchasing 
large  num.ber  of  bills  from  D who  has  comparatively  small  standing 
or  about  whom  little  is  known.  A,  then,  will  be  lia.ble  to  be 
refused,  or  if  the  fact  is  noticed  by  the  head  office,  the  bra.nch 


_t;4tvVv;i:»  /:.  ■:-  3fcif  >»4r  jjt;:  ;c  ife 

*'-  .r'.''^-  'v  ■ ' ';.tW.  - ^■•■‘ST'  ' " 

U •■  ■*  ' . -0  ■■  _i 

»4^- ‘ — V.-  ;, . » ■ . a*^4  '■*■  «>i t 

■■■..,>-  '.  V ^s?i- 


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^'|\V’-  j 


<*« 


H8<Si 

T'^. 


/J 


4 1 


'■‘^^''^'^'^**71'!’  . >0  :’v  . 

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,;•  V‘  ;.'■  - ^ ..^.  rr  ‘'df  ■ ■■  . 

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. Ai ' ..,  11  yy  /' *■  . ^ *u  ' 


0.1  • 


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•f.  xitt  .'t^jr^.  y./.U* 


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:*i*  V a .:  r,  9 ( X 6 ' T^^'.  '^; : 


^i«t^<3ir  1b/  ‘X'-v^-.  ’ 


n .'(&• 

^e'.C. 

iSfct*?;  -.  '.  - ■ 

V, 

• jV  -.W' 

' ' ■ y ' • .;  J - • s 

Vi.  - aV’,4;’  ^:<7T. 

<■  Vi.  - iV’,4;’  ^:<7T.  '*^415 i,.  Ao'iUrftii# 

' I , . ii.-  . ■ ^ • ' ’.‘  - ' . iii®^  '^. 


.-'  I 


;:  r ■ 


!•  S|4.'i'^  .^',c  i 'j:  -:i^»  !J.i;?!.t  a-^ y'  v^.Ci 


31 


' ill  be  at  once  notified  about  his  condition. 

The  business  of  the  ’shroff’  is  a rather  specific  one. 

The 'shroffs’  finance  nearly  the  whole  of  the  internal  trade  of 
India,  and,  rarely,  if  ever,  discount  European  paper  and  never 
purchase  foreign  or  sterling  bills.  Neither  do  they  lend  money 
on  government  papers  or  securities,  but  confine  their  advances  to 
the  discount  of  the  ’hundis',  to  loans  to  cultivators,  and  aga.inst 
gold  and  silver  bullions.  The  ’hundis’  they  purchase  are,  for  the 
most  part,  those  of  traders,  small  and  large,  at  rates  of  discount 
ranging  from  9 to  25  per  cent  per  annum,  but  the  ’hundis’  they  buy 
from  and  sell  to  each  other,  which  are  chiefly  the  traders  ’hundis' 
bearing  the  ’shroffs’  own  endorsement,  rule  the  rates  in  the 
Indian  native  market  and  are  generally  negotiated  during  the 
busy  season  at  from  5 to  8 per  cent  discount.  They  also  discount 
their  endorsements  pretty  larg-ely  with  the  Presidency  Banks  when 
ra,tes  are  low  and  discontinue  doi  r^g  so  when  they  rise  above  6 per 
cent. 

As  already  mentioned,  ’hundis’  are  of  two  kinds  - pure 
finance  bills,  known  as  'hand  bills’,  and  trade  bills.  The  banks 
are  much  more  particular  as  to  the  amount  of  the  former  that  they 
discount  for  a ’shroff’  than  that  of  the  latter.  Tliis  is  not 
because  they  receive  any  documents  on  accounts  of  trade  bills,  • 
(their  direct  security  is  just  as  personal  as  in  the  case  of  'hand 
bills'),  but  because  they  know  that  some  where  or  other,  produce 
or  goods  exist  against  the  credit  so  created,  that  such  goods  must 
have  been  hypothecated  to  one  or  other  of  the  'shroffs’  whose 
names  are  on  the  bills,  and  that  if  anything  goes  wrong,  such 


> « ‘s  A \ 

;.n.  J ‘I 

/a  , 

i ‘ .•■•  . . » 1 . " . .-VO]  • 'V,' 

' • * - \ ,v 

. • : . I • i'  ' A. ^ .)•^o;^ 

I ••  • » . . ■ 

■4  \'i^  '■<  '.  • :•  « . :.*  , ■••■••  • t f 


. . ita.  I 


1 • • / t 

\ ." 

‘ i4»- 

: - ^ , ’•  J:it\ 


33 


*sliroff3’  will  "be  able  to  realize  of  the  goods  and  so  to  reimburse 
the  subsequent  holders  of  the  bills  to  whom  he  is  liable.  In 
the  case  of  ’hand  bills’  on  the  other  hand,  it  is  impossible  to  say 
definitely  how  far  these  represent  a genuine  trade  demand. 

The  ’hundi ’ rate  rises  and  falls  with  the  bank  rate 
proper,  though  somewhat  in  advance  of  it,  and  naturally  so,  for  one 
is  a distant  rate  and  the  other  a rats  for  day-to-day  loans. 

Thus,  at  the  beginning  of  the  business  season  the  ’hundi’  rate 
is  usually  higher  than  the  bank  rate;  the  reverse  being  the  case 
when  the  sTack  season  is  about  to  begin.  When  the  bank  finds 
that  it  is  not  getting  enough  ’hundis’  and  its  money  is  lying  un- 
employed it  puts  down  the  ’hundi’  rate;  when,  on  the  other  hand, 
it  feels  that  it  has  already  got  too  much  money  in  the  market,  or 
for  some  reason  or  other  wishes  to  consolidate  and  conserve  its 
resources,  it  puts  up  the  ’hundi’  rate  and  may  even  go  to  the 
length  of  refusing  to  (;y  new  ’hundis’.  On  some  special  occasions, 
when  the  bank  is  very  hard  pressed  for  money  it  may  impose  a 
prohibitive  rate  so  as  to  force  the  ’shroffs’  to  endeavour  to 
raise  money  elsewhere  instead  of  renewing  their  ’hundis’  with  the 
bank.  The  following  statement*  will  show  the  amount  of  ’hundis’ 
held  by  one  of  the  Presidency  Ba,nks  at  various  dates  during 
1P15-18.  Figures  are  also  given  to  show  the  bank's  ’hundi' 
business  in  comparison  with  its  total  business.  It  will  be  noticed 
that  on  some  occasions  over  a third  of  the  bank's  total  advances 
have  been  represented  by  the  purchase  of  ’hundis’. 

♦ Appendices  to  the  report  of  the  committee  on  Indie.n  Exchange 
and  Finance,  1920. 


.'  V ..I  ' 'jj 

. „**.■.■  'vr  ' ' ' 
''  ■•,.  .. 


•'  Tkf  ■'\'  '' 


r 


f S 


km 


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/I  ' 


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k 

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f 


33 


(in  lakhs  of  rupees) 


Date 

Bills  Disc. 

Total 

Average  bank 

advances 

rate  for  year. 

f 30th 

June 

204.86 

933. S2 

5,837 

1915 

.31st 

Dec , 

259,33 

1033,79 

5,543 

I"  30th 

June 

224 .46 

106'?,78 

7,252 

1916  ' 

.31st 

Dec . 

316 , 58 

1233,62 

6 , 890 

^ 30th 

June 

179,32 

1402.28 

5.364 

1917  ^ 

^31  st 

Dec . 

500,29 

1449.38 

5.773 

rsoth 

June 

255,41 

1463,79 

5.298 

191c  ' 

^31  St 

Dec . 

200,17 

1693, 

The  rate  charged  for  loans  against  the  gO'/ernment  se- 
curities is  the  hank  rate.  It  is  slightly  lower  than  the  rate 
of  advances  on  other  securities  and  of  discounts.  The  rates  are 
not  the  same  in  the  different  provinces  and  are  influenced  largely 
hy  the  demand  for  money  required  to  finance  exports  to  foreign 
markets  and  to  ohtenn  raw  materials  for  the  Indian  industries. 
Dealers  ma^'-  obtain  the  loans  from  the  hanks  in  order  to  return 
the  advances  made  to  them  hy  the  'shroffs’,  and  in  that  way  two 
money  raa.rkets  come  into  contact  with  each  other.  When  there  is 
less  money,  the  Presidency  banks  will  attract  deposits  for  short 
periods  by  offering  higher  rates  of  interest.  The  rates  are 
naturally  high  in  the  busy  season  and  low  in  dull  season.  The 
following  table*gives  the  maximum  and  minimum  rates  of  the  Pre- 

♦ Kale,  V.G  . — Indian  Economics,  p.273. 


V* 


<» 


f'- 


1 


V * -i  4‘f  { 


m. 


\ 


%' 

•> 


1 


. \ ‘ ' * 


I « 


3 •!  • • Tf  ' 

••  *•  • - ,•  ♦* 


' r 


■ ■ / . 


^4 


>.'  * '■»  n 


t 


.J»a>V  . , ’J  '.  ■’  :.  .. 

,.'  »■  I ' *5  C:  U .' ». -b  J : 'l,'  - 

ij  ; ;v  I"'  : 


•fiWi 


34 


sidency  banks. 


1913 


1914 


1916 


1913 


Max . 
■p . c . 


Bank  of  Bengal  8 
Bank  of  Bombay  7 
Bank  of  Madras  7 


Min. 

p , c . 

3 

3 

3 


Max 

p . c . 

7 


S 


Min, 

p . c , 

3 

3 

4 


Max . 

p . c . 

8 

8 

8 


Min,  Max.  Min. 
p.c . p.c.  p.c . 


5 

4 


6 

6 


5 

5 

6 


With  regard  to  the  Exche^nge  banks,  it  is  found  that  they 
originally  confined  their  business  almost  exclusively  to  the 
financing  of  the  external  trade  of  India.  In  recent  years  , 
however,  most  of  them,  while  continuir^  to  finance  that  part  of 
India’s  trade,  have  also  taken  as  active  part  in  the  financing 
of  the  internal  portion,  and,  besides,  have  entered  into  other 
business  in  India.  The  operations  of  the  Exchange  Banks,  at 
present,  are  divided  into  tv;o  kinds,  viz.,  (l)  exchange  business, 
and  (s)  ordinary  business. 

In  exchange  business,  bills  against  the  export  and  the 
import  trades  are  drawn  either  as  documents  on  payment  (d.P.), 
or  documents  on  acceptance  (d.A.).  The  banks  purchase  these 
bills  of  exchange  drawn  by  exporters  of  produce  and  discount 
them  on  the  London  banks,  or  realise  them  when  they  mature. 

Through  their  London  offices  they  purchase  import  bills  which  are 


li  ‘ . il  , 'th. 


■■  1 '4-j 


' , \ 


• . - . \ 


•i'',  X 

w . \'.  ,,  'V  am  :'X^^  ' 

ifi. .r,.u 


. .T»fP ks  ' .,;  ; • :is  .vfo<ui  ’■■•:, 

e .'"  ■x.eP?  tsg!  S(,-^  rt- . i5i4%ts 'jit>  jui^. 


i ■>' 


\ . 


• SJ^', 


..  ' •'••V'*  i 

C'':"  '■■  .r; 


. J7K^ 


iS 


> T>^ 


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:h 


■h;^'  ■, 

; • 

' ,t  , 

; ■ ^rcjkSF  :'  1, '>4.V  t: 


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l>  4 


...  ',•  ^;+v'  . Mm 


*> 


j[|^jJ|‘  J(;^V  - 'i  ••  * f‘i-.:W'  r‘''.lff^''^51|' x’f 


■ V,;;  m . 


: . . . • ’If  ■??;  t*  , ^L-/$w  *v,  ft vi^. 4 ^ 


r , ' I < 


ifel  4*i  tr.  *1  ^10 

■^^{}l.  U ' ,'  AvW  ■''^.T; 

V*  ' 4-f • 't 4 f .V cti  -X  ti\c  I' lit  . A uA  1 ni  i^'ftpif 

. . »‘  . '4'^  ■'5/'  ' • ' <•  ■•(!..■'  Y'  *''^r'  *1  '1*4 


. ^■'^•  ' X , 


- I • ^»  ■ If  , . *1  ' ’^3 

« (' 4 . •"  .fc  w,  • ilbh.  'Hty* 7-  -‘ 


, ■■  ’ . I ■ ,'  .’  f I I . ‘ — : •.  \ #•  |\  , . , ., 

. I ' ■ ^ ' ' . A‘,  •.  ' < ’ - ■'’\-  ■*)^^''  ' 

>»  4 1/  i.'/*.  ft  w ■-  V*  'T- j '?'<■’"  « .’  to ff'VfCf ,0  ><»  Xiitfj 

J t^-  *t  V f 

‘-i'-  ’ ■ ‘ V'.^  y :.S'  , : ..' 


,.(fi  ,,' , * • 


>.  j‘^1''’''.vl’'' ii.  4u^- Jr  a*:}  I'lkut'K&niia 


35 


drawn  on  consignees  in  sterling.  The  documents  on  acceptance 
hills  as  a general  rule  are  discounted  or  rediscounted,  immediate- 
ly after  acceptance.  The  exchange  banks  have  practically  a mono- 
poly of  the  export  finance  in  India  and,  in  view  of  the  volume 
of  the  trade  which  has  to  be  dealt  with,  the  banks,  it  is  appa- 
rent, would  need  to  utilise  a very  larpe  proportion  of  their 

ableo 

resources  in  carrying  through  the  business.  They  ars^  however, 
through  a system  of  rediscount  in  London  to  limit  the  employment 
of  their  own  resources  to  a comparatively  small  figure  in  relation 
to  the  business  they  actually  put  through.  As  the  value  of 
India’s  experts  ncrms-dly  exceeds  that  of  the  imports,  the  diffi- 
ciency  in  import  bills  is  made  good  by  the  purchase  of  council 
bills*,  and  telegraphic  transfers,  and  shix^riient  of  gold,  The 
following  statistics  will  give  an  idea  of  the  position  of  the 
Exchange  Banks  on  December,  1918.** 


Wo.  of  ^ Paid  up  Reserves  Derjcsits  Gash 
banks  capital  Out  of  In 

India  India  India 


. ' £1000  ■^£1000  £1000  RIO  00-  “RIOOO 

vT)Banks  doing 
a considerable 
portion  of  their 
business  in 

India,  5 4012  5159  61 '^73  5036S&  103466 

(b)  Banks  which 
are  merely  agencies 
of  large  banking 
corporations  doing 
business  all  over- 

Asia.  5 18257  12020  242896  102845  119442 


* Bills  issued  by  the  secretary  of  State  for  India. 

**  Kale,  V.  G.  — Indian  Finance,  - p.  356. 


r 


» 

r 

!' 

h 

j 


I. 

‘4 


ii 


r 


i 


or 


^ ■*---^.  - / 


iji< 


.'■  "nTS*? '::,  ■. 


I 


'C 


I ^ ^ . 

, «? 


4 fc 

V 


. ; .1 


I 


' 1: 

•*  ' .'  .'  i 

f i •■  •.  v; 


rfv*> 


.•'.  .t  xo:‘- 

■ s ;;. 


36 


Ordinary  banking'  business  is  also  carried  on  by  the 
Exchange  Banks,  and  in  this  the  competition  has  been  considerably 
felt  both  by  the  Presidency  Banks  and  the  Indian  Joint  Stock 
banks.  The  competition,  with  the  latter  banks,  is  in  raising 
deposits,  whether  on  current  accounts  or  as  fixed  deposits. 

Great  progress  has  been  made  by  these  banks  in  this  field  of 
business.  The  terms  for  deposits,  both  on  fixed  deposit  and 
on  current  accounts,  are  as  a rule  more  favorable  than  those  of 
the  Presidency  Banks,  while  less  favorable  than  those  of  the 
Indian  Joint  Stock  Banks,  The  Indian  deposits  in  the  Exchange 
Banks  in  1917*  amounted  to  £36,000,000  as  against  £50,000,000 
in  the  Presidency  Banks  and  £21,000,000  in  the  India.n  Joint  Stock 
Ba,nks . In  loans,  overdrafts,  and  d.iscounts,  there  is  also  com- 
petition between  the  Exchange  Banks  s.nd  the  above-mentioned 
banks,  a.nd  success  of  the  latter  banks  is  great  in  these  fields 
also.  Upon  the  strength  of  the  deposits  a bank's  participation 
in  loans,  cverdra.fts,  and  discounts  business  depends.  The  extentj 
then,  of  the  Exchange  Bank’s  activity  in  this  ordinary  business 
can  readily  be  estimated  from  their  deposits. 

The  banks  engage  themselves  mostly  in  accepting  deposits 
and  carrying  on  financing  the  internal  trade  of  the  country. 

They  also  help  in  the  grov^th  of  industries  by  giving  accommode-tion 
to  many  shop-keepers  and  traders  in  their  business.  They  offer 
a rate  of  interest  from  5 to  6 per  cent,  which  is  rather  high, 
for  deposits  fixed  for  a year  or  two  years. 


* Shirr as,  G.F.  — Indian  Finance  and  Banking,  p.  364, 


37 


Elsewhere  the  functions  of  the  indigenous  banking 
firms  and  the  money-1  end.ers  like  'shroffs’  etc.  have  been  mention- 
ed, and  it  will  be  unnecessary  to  enter  into  the  discussion  of 
it  again.  A few  words,  therefore,  will  be  devoted  here  to 
Banker’s  Clearing  Houses  in  India. 

These  houses  in  India  do  not  play  a great  role  in  the 
banking  business  of  India,  yet  their  importance  is  not  negligible. 
Some  of  these  are  located  in  the  interior  of  the  country,  but 
the  principal  ones,  one  in  each  cit3s  are  situated  in  Calcutta., 
Bombay,  Ka.dras,  and  Kerachi,  The  first  two  of  these  are  by  far 
the  most  important  owing  to  their  favorable  locs.tion.  The 
members  of  these  clearing  houses  consist  of  the  Presidency  Banks, 
most  of  the  Exchange  Banks  and  Eng'lish  BarJcing  Agency  firms, 
and  a few  of  the  better  known  of  the  IccaJ  Joint  Stock  Banks. 

No  bank  is  entitled  to  claim  membership)  as  of  right  and  any 
application  for  admission  to  a clearing  house  must  be  proposed 
and  seconded-  by  two  members  a.nd  must  be  subject  thereafter  to 
ballot  by  the  existing  miembers. 

The  duties  of  these  clearing  banks  ere  undertaken  by 
the  Presidency  Banks  a.t  each  of  the  places  mentioned  and  a re- 
presentative of  each  member  attends  at  the  office  of  tha.t  bank 
on  each  business  day  at  the  fixed  time  to  deliver  all  cheques 
he  may  have  negotiated  on  other  members  a.nd  to  receive  in  exchange 
all  cheques  drawn  on  him  negotiated  by  the  latter.  After  all 
the  cheques  have  been  received  and  delivered  the  representative 
of  each  bank  advises  the  settling  bank  of  the  difference  between 
his  total  receipts  and  deliveries,  and  the  settling  bank  thereafter 


^ i^wwain 


ii*.  K-'*/_  %>.■  A t , ■;  .H\l-  ■•  J 


Vv.  • * 

, '..♦i  jw'^^  . X^ti-I  (J 


(Jl 


• ^",w"  '’v' 


■*  . ' ‘ '-■■'!  ' * , 'N'  . '•"’1 

p\  ■ ‘ ’ ' "■  ( ' "■  I ’.j,  * ■ ,,^  ' ■ -V'  '”  '’f  “' 

• ^*1-  . V t .■.U»-t?/5  ,J  .■  , 

=r..y,»  ■ 


U ‘ r: 


f '^v  " ■ •.'  j»'"i , '■" . ..  , * < ^ i^'  «i 

c-  AT  • :.'•'  >,»'U:-f;‘  t. *f.^4'  • ■V*.v^y>^.<!?^-ii!|  • • -rt  ■ 


r-'"'’ '•' i 'V  ■ , "'iflii  '"'  ■” -''jF'  if* 

^ ‘ ■ *r  ’.v  . ■'»-  ^.*  . »'V'(''i  ' •■  . •'’  ' ^ " ’ i' k>l  ■ • ' . ' ^ ‘ •;  V '\ 

^ ^ ' to' ; f ‘ .•w,4*  toB-V- " MwtfSO  •: 


< . ^'.r.  ■•■■■  V ' ,'W.r,  : t*  ■ <yJ 


V'  \* 

j ■" ' 


t';  '"T-'  ' ■. 

t'  • •- ^ ••  • to'.,to  ( ' I . ^9f>  '^,0  • j 


i’  'r  * .'.V,  ,.M'  i, 


strikes  a final  balance  to  satisfy  itself  that  the  total  cf  the 
debtor  balances  agrees  with  the  totals  of  the  creditor  balances. 
The  debtor  barik  then  arranges  to  pay  the  amounts  due  by  them  to 
the  settling  bank  during  the  course  of  the  day  and  the  latter  in 


turn  arranges  to  pa^'’  on  receipt  of  those  amounts  the  balances  due 
to  creditor  bank.  In  pra,ctice,  however,  all  the  members  keep 
bank  accounts  with  the  settlir.g  bank  so  that  the  final  bala,nces 
are  settled  by  cheques  and  book  entries,  thus  doing  awa.y  with 
the  necessit^^  for  cs-sh  in  anv  form. 


39 


Chapter  IV. 

Situation  of  the  Indian  Banks  from  1913  to  1916, 

The  period  of  five  years  from  1913  to  1918  in  the 
history  of  the  Indian  banks  was  of  great  importance.  In  that 
period,  the  Indian  banks  experienced  a severe  convulsion  which 
made  their  continuation  of  business  doubtful.  Never  before  had 

they  faced  such  crisis  as  they  did  at  this  time.  The  crisis  was 
due  to  two  significant  happenings  which  made  the  era  an  important 
eventful  one.  On  the  one  hand,  the  Indian  Joint  Stock  banks 
created-  a panic  in  banking  circles  because  of  their  failures  in 
1913;  and,  on  the  other,  the  outbreak  of  the  great  war,  a year 
after,  brought  about  a situation  which  made  the  positions  of  the 
banks  somewhat  stabilised.  In  the  case  of  failure,  the  Indian 
Joint  Stock  banks  and  the  private  banks  were  affected,  exclusively; 
while,  i n the  case  of  war,  all  classes  of  banks  felt  the  condi- 
tions alike.  The  former  removed  the  banks  of  unsound  sta-nding 
from  the  field  of  operations;  while  the  latter  strengthened  the 
ones  which  were  left  to  continue  the  business.  The  two  events 
of  the  period  are  thus  reversal  in  their  effects,  and  therefore, 
they  are  taken  up  separately  under  the  headings  just  given. 

1,  Failure  of  Indian  Joint  Stock  Banks, 

and 

2,  Effect  of  the  Great  War  on  Indian  Banking, 


rT5r 

'it 


.'.-.'i^li  :W^5#:cr'  *'  '* 


^ 1 if  ji 

♦1. 


4 W*Lidj 


,.  ^*l>.Jx#;£;|(,  ‘fr,;  ••  ;'.■  ''  ’pM 

»-  m :.;:V:  ■ A.r ,.  , 

' ' • V • •■  v^4‘*  '■iijf. 

V*_ 

. ^...'  , v-^.' 

■•  •'j*:  ' 


'^  - ‘■-»  SZau.'.'S,'?  tXiT"*  "''■■*"' «iCi,f'  .*J''v 

fP.  . ' C^;#' 

rV  '^’-  ili 


w .iM»?4vi;  ii >t, A. ' I-!/'". 


W.A* 


"■  * 'r-  . 


M ' ij  J*i.  * % 

fv  »U‘.  ,.  , , ■».:,  I 

' ■ / ' '*  r 

.rs'-'iT  '^‘i.’»:!,-1< 


■>(  h%> 


l'  > 


f^  .'  , I 

"V  ' 


, ,_™. 

■ilH 


1 •*  , tf*  *'  ■ f i^*' ' .1' 


X>'  ft  M;-:^4f■  • • * y^i'u.  i*.  ' ■- .</;.'■:■•  • ap|M«W 


<i  ; 


;>  i«-5'  V-''ar*.f 

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40 

1.  Failure  of  the  Indian  Joint  Stock  Banks 

Failure  of  banking  institutions  is  not  a new  thing  in 
the  world.  From  time  immemorial  failures  have  occured,  and  it 
will  continue  to  occur  so  long  as  the  true  principles  underlying 
such  institutions  are  disregarded.  In  a few  cases,  failure  of 
this  type  of  institutions  has  been  of  exceptional  nature  due  to 
remote  causes;  but,  in  the  majority  of  the  cases  failure  has  been 
due  to  wanton  supervision  or  careless  management  and  deviation 
from  the  right  path  of  proper  business  activities. 

India  has  not  escaped  this  financial  disturbances, 
and  she  has  witnessed  several  in  the  last  century.  But  they  were 
all  more  or  less  mild  in  comparison  with  the  recent  one.  The 
first  severe  financial  crisis  took  place  in  the  years  1329-31, 
when  several  hanks  collapsed.  There  were  not  many  barking  insti- 
tutions at  that  time;  and  the  majority  which  suffered  this  shock 
failed  while  only  a few  were  able  to  remain  solvent.  There  were 
several  other  crises  in  the  last  century,  which,  however,  did  not 
have  far-reaching  serious  effects.  At  each  time  not  more  than 
two  or  three  banks  were  oblip-ed  to  close  their  doors.  None 

o 

was  so  severe  and  so  intense  in  character  as  the  recent  one  which 
shook  the  very  foundation  of  banking  enterprise  in  India. 

Since  the  beginning  of  this  century  until  1913,  the 
Indian  banks  were  growing  vigorously.  No  public  mind  at  that 
time  thought  that  there  was  a crisis  ahead  of.  The  country, was 
apparently  prosperous,  and  ^'he  banks  were  reaping  enormous  har- 
vests from  their  business  activities.  What, then,  led  to  this 


41 


situation  the  following  pages  will  take  it  up? 

Several  years  preceding  the  failure  a considerable  nuua- 
her  of  hanks  established  themselves  in  Western  India,  in  the 
Pun;jab,  and  in  the  United  Provinces.  They  grew  so  suddenly  tha.t 
the  general  public  thought  banking  a very  profitable  business. 

Some  of  these  banks  made  every  possible  attempt  to  get  large 
profits  without  being  guided  by  a staff  of  experienced  officers. 

As  the  government  had  no  restrictions  on  the  conduct  of  business 
of  these  banks,  they  began  to  speculate  extensively  in  silver 
and  in  other  industries  of  dou'ctfui  char-^cter.  Many  of  the 
banks  had  inadequate  reserves  against  their  deposits,  and  the 
balance  sheets  were  in  several  cases  good  examples  of  window- 
dressing,  i.e.,  skilful  manipulation  of  the  accounts.  The  per- 
centage of  cash  to  liabilities  on  deposits  was  only  11  , and  in 
very  many  ca.ses  the  percenta^ge  was  lower  tha.n  this.  1/Ynile  the 
proportion  per  cent,  of  the  cash  to  the  liabilities  on  deposits 
of  the  Presidency  Banks  had  been  33  and  of  Exchange  Banks  SO,  on 
an  a^’-erage , that  of  the  Joint  ptock  banks  had  not  exceeded  15  or 
16.  It  is  hardly  justifiable  for  banks  to  have  such  insufficient 
percentage.  Then,  many  too  had  an  imposing  capital  but  little 
paid-up. 

The  crisis  started  in  Northern  and  Western  India  (where 
the  banks  had  grown  up  like  mushrooms)  in  September,  1P13,  It 
began  with  the  failure  of  the  People’s  Bank  of  India,  in  the 
P^unjab,  which  went  into  liquidation  on  November,  1913,  after 
being  suspended  for  about  a month.  The  closing  of  this  bank  re- 
sulted in  a very  large  number  of  other  failures,  the  principal 


43 


being  that  of  the  Indian  Specie  Bank  of  Bombay.  Altogether  85 
banks  with  many  branches,  including  a like  number  of  small  firms, 
were  liquidated;  of  which  56  were  more  or  less  important.  The 
banks  which  suffered  most  were  the  ones  located  in  the  Punjab  and 
in  Bombay.  Of  these  56  banks,  38  were  in  the  Punjab,  11  were  in 
Bombay,  9 were  in  the  United  Provinces,  3 were  in  Madras,  3 were 
in  Northwest  Frontier  Province,  3 were  in  relhi,  and  one  each 
Was  in  Bangalore  and  Ba.luchistan. ♦ The  most  important  failures 
of  each  Province  were:  In  the  Punjab  — the  People  ^s  Bank  of 
India,  the  Popula-r  Bank,  the  Orient  Bank  of  India,  and  the  Punjab 
Co-operative  Bank;  in  Bombay  --  the  Indian  Specie  Bank,  the 
Credit  Bank  of  India,  and  the  Kathiawar  and  Ahmedabad  Banking 
Corporation;  in  the  United  Provences — the  Bank  of  Upper  India. 

It  was  very  noticeable  that  in  Beng.al,  which  is  the  most  important 
Province  in  India,  there  was  not  a single  bank  of  even  less  im- 
portance that  was  compelled  to  close  its  doors.  The  reason  is 
that  there  is  less  speculative  business  and  more  experienced 
men  in  banking  in  Bengal  than  in  the  Western  and  Northern  parts 
of  India.  The  following  table#  will  show  the  number  of  banks 
liquidated  between  1913  - 1913.  It  will  also  show  the  position 
of  the  banks  in  their  ratio  of  paid-up  capital  to  the  subscribed 
and  authorised  capital: 


* 

U.S.  pept , of  Commerce  - Special  Consular  reports,  V.  7S,p.S4. . 

# 

Kale,  V.  Ct.  - Indian  finance,  p.  364. 


43 


Year 

No.  "of 

banks  liquidated 

(in 

capital 
thousands  of 

rupees ) 

Authorised 

Subscribed 

Paid-up 

1913  (two 
months ) 

12 

27,400 

16,456 

353 

1914 

43 

71,050 

24,561 

10,912 

1915 

11 

5,850 

791 

460 

1913 

13 

23,090 

2,090 

423 

1917 

9 

7,350 

3,575 

2 , 526 

1=»18 

7 

20,350 

2,436 

1,461 

As  soon  as  the  crisis  came,  the  People *s  Bank  of  India  , 
because  of  its  failure,  spread  panic  among  the  depositors  , and 
caused  the  whole  banking  business  of  India  to  face  a. critical 
situation.  The  bank  with  a paid-up  capital  of  13  lakhs  of 
rupees  and  deposits  of  126  lakhs  of  rujjees  went  into  bankruptcy, 
and  caused  the  collapse  of  a number  of  other  Indian  managed  banks 
in  that  province  and  in  Bombay.  The  spread  to  the  Bombay  Pre- 
sidency was  due  to  the  branch  banks  of  the  important  banks  located 
in  the  Punjab,  and  they  had  to  close  up  the  ’cusiness  when  the 
head  offices  failed.  The  Indian  Specie  Bank  failed  owing  to 
gross  mismanagement.  Mr.  Doraiswamit  in  connection  with  the 
failure  of  this  bank,  explains  that  ” the  Indian  Specie  Bank, 
under  the  management  of  the  late  Mr,  Chunilal  Saraya,  cooked  the 
accounts,  without  the  knowledge  of  the  directors,  and  speculated 

* Dorasws.mi  - Indian  Trinance  a,nd  Currency,  - p.ll7. 


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44 

extensively  in  silver.”  Liquidation  of  the  Specie  Bank  created 
panic  everyflrhere , and,  particularly,  it  affected  the  Western  and 
Northern  regions.  The  tide  s?7ept  away  many  smaller  hanks  causing 
immense  hardships  on  the  part  of  the  depositors,  who  were  mostly 
of  the  middle  and  poor  classes. 

The  failure  of  the  hanks  may  he  attributed  to  several 
causes,  these  combined  made  their  positions  insecure.  The 
causes  are:  (l)  directors  of  hanks  lacking  experience  in  the 

hanking  business;  and  their  failure  to  control  the  operations  of 
the  hanks;  (s)  keeping  of  improper  accounts  and  advancing  loans 
without  sufficient  security;  (3)  investment  of  large  amounts  in 
such  business  as  it  could  not  he  easily  realised;  (4)  speculation 
of  the  managers  in  business  which  banks  should  avoid;  (s)  using 
of  depositors^  money  obtained  at  a high  rate  of  interest  to 
fin'ance  concerns  of  doubtful  profitableness;  (s)  distribution  of 
dividends  among  sheireholder ’s  out  of  capital  and  the  concealment 
of  this  fact  by  skilful  manipulation  of  the  accounts.*  These 
internal  defects  were  carried  to  such  an  extent  that  the  banks 
simply  could  not  go  a step  further.  The  report  of  the  accounte.nts 
appointed  in  connection  with  the  Specie  Bank  failure  contains 
the  following  remarks  : ” We  have  found  the  books  in  an  incomplete 
state.  They  were  not  written  up  to  date.  The  general  loan 

ledger  contains  receipt  for  miscellaneous  advances,  chiefly  on 
the  security  of  pep'ls.  ...  It  is  extremely  disappointing  to  have 
to  relate  what  can  only  be  described  as  a miserable  tale  of  the 


X.  Kale,  V . G.  - Indian  Tj^conomics  , p.  363 


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45 


lowest  form  of  fraud,  the  creation  of  fictitious  debtors  and  the 
preparation  of  demand  promissory  notes  in  support  of  these.”* 

The  investigations  thus  brought  out  the  true  conditions  of  the 
banks.  It  was  no  wonder  that  the  banks  failed  under  such  circums- 
tances . 

The  financial  panic  undoubtedly  gave  a considerable 
check  to  the  spread  of  banking,  especially  in  those  affected 
regions;  but,  it  gave  a good  lesson  to  the  banking  concerns.  It 
removed  the  vulnerable  spots  from  the  whole  banking  system,  and 
to-day  Indian  banks  are  in  a stronger  and  more  stable  condition 
than  before.  It  also  made  men  consider  the  necessity  of  over- 
hauling the  banking  system  to  meet  the  new  and  changed  conditions. 

The  Indian  Joint  Stock  banks  and  the  private  banks  were 
the  only  victims  of  this  panic,  and  the  positions  of  the  Presi- 
dency banks  were  not  at  all  jeopardised.  Mr.  Keynes  in  regard 
to  this  says  that  ”the  restrictions  under  which  they  (Presidency 
banks)  work  have  in  the  past  contributed,  beyond  doubt,  to  their 
stability.  ...  Only  by  virtue  of  its  being  absolutely  precluded 
by  law  from  the  more  speculative  forms  of  business,  have  the 
banks  survived  the  half-dozen  or  more  violent  crises  by  which 
the  Indian  financial  system  has  been  assailed  in  the  last  hundred 
years . ”** 

The  failure  of  many  banks  during  the  period  led  the 
public  mind  and  also  the  government  to  consider  some  means  by 
which  it  would  be  possible  to  check  such  crises  as  might  be  im- 
pending in  the  future.  The  question  came  up  whether  it  would  not 

♦ Pioneer,  December  21,  1913, 

**  Keynes,  J.  M.  - Indian  Currency  and  Finance  , p.  203. 


ofi  * ink  k'xb;*  rtiV* w 1.V ■ ^ ^'^M> •kVf 

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46 


"be  desirable  to  have  some  restrictions  or  limitations  placed  upon 
firms  and  individuals  who  took  the  name  of  ’banks ’bankers ’ , or 
their  equivalents.  The  government  of  India,  therefore,  asked  the 
Provincial  governments  to  get  the  views  of  the  commercial  community 
and  others  on  this  point,  and  also  issued  a circular  to  tha,t  effect. 
It  suggested  restrictions  embodied  in  the  following:  (l)  sanction 

of  a minimum  amount  of  subscribed  ca,pital;  (s)  certain  portion 
of  such  capital  should  be  duly  paid  up  within  a certain  period 
from  the  commencement  of  bu.siness;  (3)  restrictions  on  the  dis- 
tribution of  dividends  from  profit  until  an  adequate  reserve  is 
built  up;  (4)  prohibition  of  engaging  in  any  business  except 
that  of  banking.*  These  pror^osed  restrictions  are  clearly 
necessary  in  the  interest  of  the  public  as  well  as  of  sound 
development  of  the  Indian  Joint  Stock  banking.  The  government 
has  not  yet  passed  any  law  in  regard  to  these,  but  it  will  be 
not  long  until  India  will  have  such  laws  against  joint  stock 
and  private  firms. 


♦ 

Kale,  V.  G.  - Indian  Currency  and  Fins^nce,  p.  337. 


47 

S.  Effect  of  the  Great  War  on  Indian  Banking. 

The  next  event  of  the  period  for  consideration  here  is 
the  great  war  which  opened  for  banks  a field  of  speculation  in 
foreign  exchange.  The  business  of  foreign  exchanc-e.is  not 
carried  on  by  any  purely  Indian  institution  as  done  by  many  banks, 
and  hence  the  question  is  left  out  of  consideration.  The  other 
War  activities,  such  as  the  selling  of  the  government  papers  and 
bonds  etc,,  with  which  the  banks  had  anything  to  do,  have  also 
been  omitted  from  this  discussion  with  the  exeeption  of  those 
in  which  the  banks  themselves  privately  dealt  and  for  which  they 
advanced  their  own  funds.  The  point  to  'oe  considered,  then,  in 
this  connection,  is  only  the  exact  position  of  banks  whether  in 
upward  or  downward  direction,  with  regard  to  their  deposits, 
imvestments,  etc.  as  caused  by,  the  great  war.  The  matter  is 
presented  merely  in  outline  form  with  copious  statistics  to  give 
the  exact  status  of  the  banks. 

When  the  war  broke  out,  the  Indian  banks  were  in  a 
disrupted  condition;  particularly  was  this  the  case  with  the 
Indian  joint  stock  banks,  on  account  of  the  failures.  By  that 
time  some  of  the  important  joint  stock  banks  had  been  liquidated 
and  others  were  following  them.  The  depositors  were  in  a feverish 
mood  to  withdraw  their  money,  and  the  whole  Indian  bani:ing  field 
v/ris  more  or  less  topsy-turvy.  But,  in  spite  of  this  , the  war 
found  India  in  an  unusually  good  position  to  withstand  the  dis- 
locsition  of  credit  and  trade,  and  this  condition  was  due  to  a 
number  of  reasons. 


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, t '<  ' / M'  ,'  ,,,  ' 'u*  *'y’  ,' 

tjBh^ilr  VVp  f’'  4.l.'.1_  . ‘ (Vl  r -'t'kiA',,’  /^•.'.'“v.  •■  4<»>’  ''-'V’^K,^,^  » A J 

^ "'  4.  f ' *&*■  '•/  ;,'•  ' '■'>' 


'■  n^A  >;.iit^iV'r  ■.’  -^3 

>:>;:  T»yj^ 

•' 


^ < 


'^.yu^  .^.a£4/tu  : _ f 


48 


In  the  first  place,  the  Indian  banking  failures  which 
swept  over  the  country  during  the  latter  months  of  1913  had  removed 
from  the  active  sphere  of  operations  a large  number  of  badly  managed 
speculating  Indian  banking  concerns;  and,  the  removal  opened  the 
eyes  of  others  and  compelled  them  to  make  their  positions  secure. 
Secondly,  the  Presidency  Banks  had  enough  cash  balances,  due  to 
large  balances  kept  by  the  o-overnment,  to  meet  i.ny  emergency 
demands  which  may  have  been  made  on  them.  The  Bank  of  Benga,!  had 
a cash  balance  of  Rs . 160,000,000  which  was  almost  a record  and 
their  statement  showed  a percentage  of  cash  against  banking  lia- 
bilities of  56,19,*  Thirdly  the  Exchange  banks  were  also  fully 
supplied  with  cash  in  anticipation  of  the  usual  demands  on  them 
to  move  the  jute  crop  at  that  time  of  the  year.  And,  fourthly, 
the  govermnent  intimated  its  intention  to  provide  funds  to  the 
Presidency  banks  as  required,  which  in  their  turn  would  support 
all  legitimate  trade  requirements.  The  Joint  Stock  banks  also 
benefited  by  this  arrangement  of  the  government  with  the  Presidency 
banks  as  they  were  then  able  to  get  advances  from  them  for  the 
movement  of  the  internal  trades.  As  regards  loans  made  locally, 
banks  confined  themselves  to  financing  jute  mills,  tea  gardens, 
and  kindred  industries,  but  any  business  savoring  of  speculation 
had  been  discarded  after  the  crisis  and  consequent  failure.  It 
was  said  that  if  the  war  had  been  precipitated  a few  months  later, 
matters  would  probably  have  proved  serious. 

In  order  to  show  the  real  position  of  the  banks  during 
War  time,  the  method  adopted  is  to  produce  the  aggregate  balance 


* U.S.  Special  Consular  reports,  V,?2,p,B5, 


43 

sheet  of  the  Indian  banks,  and  the  statistics  relating  to  the 
items  therein.  In  these  aggregate  balance  sheets  all  the  Pre- 
sidency banks  and  thirteen  major  Indian  joint  stock  banks  have 
been  combined.  The  Exchange  banks  have  been  left  out,  for  it 
is  not  possible  to  combine  their  balance  sheets  with  other  Indian 
banks  as  their  business  is  not  only  in  India  but  outside  of  it, 
and  the  capital  for  the  purely  Indian  portion  can  not  be  separately 
distinguished.  The  following  is  the  aggregate  balance  sheet  * 
of  the  banks. 

(in  millions  of  rupees) 


December  31,  1913. 

Capital  and  Reserves 

105 

Cash  in  hand,  etc. 

195 

Deposits,  etc. 

615 

Investments 

105 

Other  liabilities 

15 

Bills  discounted, etc 

. 480 

Other  assets 

15 

Total 

735 

Total 

735 

(in  millions 

of  rupees) 

December 

31,  1917. 

Canital  and  Reserves 

105 

Cash  in  ha.nd  etc. 

430 

Deposits,  etc. 

1050 

Investments 

310 

Other  liabilities 

15 

Bills  discounted, etc 

. 535 

Other  assets 

15 

Total 

1170 

Total 

1170 

♦ The  statistics  for  this 

and  the  fol 

lowing  ones  in  this 

chapter 

►r 


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50 

The  noticeable  features  in  the  war  balance  sheet  are: 

(l)  the  increases  in  the  deposits  on  the  liabilities  side,  and 
(s)  the  growth  in  the  cash  and.  investments  among  the  assets. 
Deposits  in  the  Presidency  and  India.n  Joint  gtock  banks  increased 
by  Rs , 435,000,000,  or  71  per  cent;  cash  by  Rs.  325,000,000  or 
115  per  cent;  and  investments  by  Rs . 105,000,000  or  100  per  cent. 
It  will  be  interesting  also  to  compare  the  capital  and  reserves 
of  the  banks  in  the  pre-war  year  and  at  the  end  of  1917 . The 
following  table  will  show  that  the  capital  and  reserves  are  pra.c- 


tically  the  same,  excepting  in  the  Exchange  banks. 

Capital  and  Reserves  of  Indian  Banks 
( In  rupees) 


DecemJlj^Sl, 


Presidency  barJcs  75,000,000  75,000,000 
Exchange  bariks^  105,000,000  120,000,000 
Joint  Stock  banks  30,000,000  30,000,000 


The  growth  of  banking  credits  has  continued  rapidly, 
especially  during  1916  and  1917.  The  large  profits  which  have  been 


have  been  taken  from  "Indian  Finance  and  Banking  " by  G.F, 
Shirra.s.  The  figures  have  been  converted  into  rupees,  and  the 
essestial  portions  of  the  data  have  been  taken  only  to  suit  the 
purpose . 

* Five  Excha,nge  banks  which  have  considerable  business  in  India, 
are  included.  Their  total  capital  and  reserves  have  been  taken 
as  the  India.n  portion  can  not  be  estimated  . 


9 " 


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f'l,:- 


51 

made  by  most  Indian  industries  on  account  cf  the  war  were  reflected 
in  the  larg;e  increase  in  deposits.  The  teble  below  will  show  the 
comparative  increase  in  deposits  and  current  accounts  by  banks: 


Deposits  in  millions  of  rupees. 


1913 

1915 

1917 

Presidency  banks 

420 

435 

750 

Exchange  banks  (refer  to 

foot-note  in  the  prece- 
ding page) 

645 

855 

1260 

Indian  Joint  Stock  banks 

195 

180 

300 

The  decrease  in  1915  in  case  ci  the  Indian  Joint  stock  banks  is 
due  to  the  withdrawal  of  money  by  the  depositors  owing-  to  the 
failure  of  many  India.n  Joint  Stock  banks. 

The  percentage  of  cash  balances  to  liabilities  on 
deposits  may  also  be  examined  from,  the  d.ata.  The  tremendous 
increase  in  the  cash  balances  i n 191?  of  the  Exchange  banks  is 
to  be  explained  by  large  import  of  gold  for  cotton  in  the  same 
year. 

Percentage  of  cash  to  liabilities  on  deposits i 


1913 

1915 

1917 

Presidency  banks 

P.C. 

36 

P.C. 

34 

P.C. 

45 

Exchange  banks (doing  considerable 
business  in  India) 

17 

41 

160 

Indian  Joint  stock  banks 

18 

22 

25 

':'n 


V r f.i  / >x,  -i^T  5 ♦jHS  ” . ? ^ .*  &jCr<af»!&  'Jr  ' ’ * i • ."f' r 

' > ..•  I ''f  .' '■  ■';•*'  is  '.•w* 


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--"Ttrtr  ir‘i)ii  imriyrr  y ^ r~'~Tli;TtrrTiii7iiTir --,T||i|f*fp»w  iiyi' 


53 

The  War  had  a great  effect  on  the  bank’s  investments. 

Tn  the  case  of  the  Presidency  and  Exchange  banks,  they  were  very 
noticeable.  The  increase  in  the  investment  of  the  Presidency 
banks  was  141  per  cent,  while  that  of  the  Exchange  banks  which  Inaci 
considerable  business  in  India  wa.s  13?  per  cent.  There  was  also 
an  increase  of  53  per  cent  in  the  investment  of  the  Indian  Joint 
Stock  banks.  The  table  below  shows  the  comparative  increase  in 
the  investment. 


(in  millions  of 

rupees ) 

1913 

1915 

1917 

Presidency  banks 

?5 

130 

165 

Exchange  banks  (doing  considerable 
business  in  India) 

60 

150 

150 

Indian  Joint  otock  banks 

30 

30 

45 

The  increase  in  investment  is  due  m.aihly  to  the  subscription  to 
the  government  loans  of  all  kinds  after  the  outbreak  of  the  war. 

As  to  the  discounts  and  advances,  the  incres.se  is  of 
specis.!  interest,  with  the  exception  of  the  Exchange  banks,  in 
spite  of  the  banks  investments  of  funds  in  so  many  things.  This 
will  be  seen  from  the  following  figru.res, 

(Next  page) 


Discounts  and 

advances 

( In  millions  ' 

of  rupees) 

1913 

1915 

1917 

Presidency  ba.nks 

270 

225 

315 

Exchange  banks  (doing  considerable 

business  in  India,) 

405 

360 

405 

Indian  Joint  otock  banks 

150 

135 

210 

The  above  atatistics  and  data  have  clearly  shown  the 
position  of  the  Indian  banks  of  three  classes  during  the  war 
period.  In  al.l  aspects  of  business,  they  have  increa.sed  their 
amounts  considerably.  In  some  'cases  there  has  been  tremendous 
growth,  as,  for  instance,  in  deposits,  in  investments,  and  in 
C3.sh  balances.  The  public  thought  at  the  beginning  of  the  war 
that  there  would  be  a genera.1  failure  of  all  banks.  There  was 
perhaps  some  grounds  for  this  fear  for  the  Indian  Joint  Stock 
banks  were  still  being  liquida,ted,  and  every  where  there  was  a 
rush  of  withdrawals  of  money  by  the  depositors.  But,  the  war 
produced  a curious  effect  on  the  status  of  the  banks  and  stabilised 
their  conditions  more  than  was  expected.  The  governments 
attitude  toward  the  Presidency  banks  by  providing  them  with  funds 
was  commendable.  Speaking  generally,  then, the  Indian  banks  have 
come  out  of  the  time  of  stress  vexy  well,  and  this  ma^'’  be  attri- 
buted to  the  elimination  of  unsound  concerns,  which  took  place 
during  the  latter  part  of  1913. 


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#4i' 


54 


Chapter  V . 

A Central  Bank  for  India  and  the  Amalgamation  of 
the  Presidency  Banks, 

The  question  of  starting  a central  cr  state  hank  in 
India  on  the  lines  of  the  Bank  of  France  cr  the  Reichshank  of 
Germany  is  an  old  one,  and  has  been  under  discussion  for  several 
years.  In  India,  the  government  has  the  monopoly  of  note  issue, 
while  in  other  countries,  the  central  bank  or  a few  banks  have 
the  privilege  of  it.  The  gcvernm.ent  of  India  performs  therefore, 
m;any  functions  which  would  ordinarily  fall  within  the  sphere  of  a 
bank’s  business.  The  go^’-ernment  has  its  reserve  treasuries  and 
ordinary  treasuries,  and  supplies  the  currency  required  for  the 
movement  of  crops  at  different  times  and  in  different  provinces. 

It  keeps  its  gold  standard  and  currency  reserves.  It  also  meets 
council  bills  and  sells  sterling  drafts,  borrows  locally  and  in 
England,  and  lends  to  iruniclpal  and  local  bodies  out  of  its  surplus 
balances.  The  relation  of  all  these  transactions  of  the  govern- 
ment with  the  ordinary  transactions  of  the  miOney  ma.rket,  is, 
therefore,  very  intimate;  and  it  is  maintained  by  the  government 
through  the  agency  of  the  Presidency  banks.  For  the  interests 
of  tr0.de  and.  of  the  general  public,  it  is  felt  that  it  would,  be 
much  better  for  the  public  and  for  the  government  as  well  if  these 
functions  were  transferred  to  a created  central  or  state  bank. 

The  created  bank  would  have  government  supervision  and  control 
in  order  that  it  could  not  promote  its  own  interest  to  the  detri- 
ment of  the  interest  of  its  patrons. 


S^  '-  ■ 

^'■*  ,V  ' -.MU:  .,■ 


_«.V: 


■',  V \ J • ^ ^ '•' ' '<  wC*5t)  JLfc  • ■ .li*#  ' 

^ t lift.' 


’’  Aif> 


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■i  ■:>,;  %.-?S||^^,,  W * ‘%7  t jV'  ^ •■  t'  W*  ti” 

* * ' ' . -Mk  ' . * Ss: 

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'"'V' 

• '■^'i^'  #■  '-•  • 'tr.-  ; . 1 ' (t  f'4»>- , SKtii  • 'fv%* 

..  - ‘.  - ‘ ii  • • aV*  i - ..•  jj 


^ TA  • ? 


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$ »i/£;  , ...^ 


7l\f 


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■'  .'  *j 

iii 


» > 
• H 


II  VVJ-.  .a  ir;  4i;|>*^''; 

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i ' ' >'  - ■ ' ' -^yi  -v 

“,..-,4>  .r  1 '.  •- :'*i' U r lo..'i;t|*'fe 

: /.M  .:  ..jfr 


. Li  ^ 


wSl'  ^ ' 3f 'j 

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, ''  ■ 'I  if."  ■'  **'  ^ 


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• if:l 


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V .t-3;fl  ri’-*  *4!  4/  ,'|>. 

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« ••''«  ■ •■  . fit  ,trt\  •? : ,^.. ... 


it*  ' „ Xp"tJ^..v*;?^.  *:*r,*<  ,'ijT,i.«r''ft< 

"'it  . A ' .'A  - ' ■ ' 

vv^-v.*  rW  , •■  ^>;.^'i^yr 

•'■  '■'*^  ■ -^^y-  .''V  ■■Ji'Ar  *‘^'.?.i‘'  V;  ^ jj  ..  ■■'.  .' 

^ ..^  ; .3.  ->  , ^ : • 


«J' 


'M 


■ .V., 


tsa^vr:'  mfv  u-*scr; 


' ,v 


55 

The  first  scheme  for  such  a bank  was  developed  in 
1836  by  a body  of  merchants  interested  in  the  East  Indies  business. 
They  submitted  to  the  court  of  directors  of  the  East  India  Company 
a project  for  a great  banking  establishment  for  British  India. 

Such  a bank,  as  they  argued,  confining  its  transactions  strictly 
to  banking  principles  and  business  would  under  judicious  manage- 
ment and  control,  become  an  instrument  of  general  good  by  facili- 
tating Indian  commerce,*  giving  stability  to  the  monetary  system 
of  India,  and  afford.ing  the  company  facilities  and  adva.ntages  in 
their  financial  arrangements.  From  1860  to  186?  there  was 
some  discussion  of  the  possibility  of  the  Bank  of  Bengal  develop- 
ing into  a Bank  of  India.,.  To  this  suggestion  the  government 
council  members  were  favorable,  and  in  186?  the  Secretary  and 
Treasurer  of  the  Bank  of  Bengal,  Mr.  Dickson,  laid  down  before 
the  government  a specific  proposal  for  the  amalgamation  of  the 
three  Presidency  banks.  The  opinions  of  the  viceroy  and  the 
Secretary  of  Stcite  for  India  were  unfavorable  toward  this  propo- 
sition, and  the  project  died.  Nothing  further  was  done  until 
the  subject  was  brought  before  the  Fowler  Committee  in  1899  and 
1900.  Both  the  Secretary  of  State  for  India  and  the  viceroy 
were  favorably  inclined  toward  the  idea,  but  it  was  again  tempo- 
rarily abandoned  as  it  was  thought  that  the  time  was  not  propiti- 
ous. The  provincial  and  personal  jeslousies  of  the  banks  at  this 
time  were  so  strong  that  the  scheme  could  not  have  been  managed 
successfully  and  it  was  much  better  to  abandon  it.  It  was 
brought  up  again  for  consideration  before  the  Chamberlain  Commis- 
sion of  1913.  • The  comitiission  declined  to  express  any  definite 
* Keynes , J.  M.  - Indian  currency  and  Finance ,p. 833. 


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56 

views  on  it  a.nd  to  ^ake  any  recommenda.ti ons  about  it  in  the  absence 
of  sufficient  material  and  an  opportunity  for  adequate  discussion. 
The  commission,  nevertijLess , regarded  that  an  enquiry  be  made 
fully  which  would  consider  the  feasibility  of  a central  bank,  and 
would  either  pronounce  definitely  against  the  desirability  of  its 
establishment  or  submit  to  the  authorities  concrete  scheme  for 
its  establishment  fully  worked  out  in  all  details.  The  commission 
made  a careful  m.erriorandum.  which  clearly  pointed  out  the  advan- 
ta.ges  of  a state  bank  both  to  the  government  and  to  the  mercantile 
community.  This  made  a strong  impression  in  India  when  it  was 
made  public.  The  advantages  which  it  suggested  were:*  (l)  the 
abolition  of  the  independent  treasury  system,  its  place  being 
taken  by  a la,rge  central  bank;  (s)  the  discontinua.nce  of  the 
system  of  keeping  large  sums  at  loans  for  short  periods  in  the 
London  m.oney  market;  (3)  the  management  of  a note  issue  by  an 
agency  possessing  greater  opportunities  for  increasing  the  note 
circulation;  (4)  the  handing  over  of  questions  relating  to  bailances, 
paper  currency,  and  loans  to  expert  bankers;  (5)  the  release  of 
government  balances  and  the  development  of  paper  currency,  thereby 
benefiting  the  trade  as  well  a,s  avoiding;  large  fluctuations  in 
in  discount  rates;  (s)  the  increase  in  branch  banking  in  many 
parts  of  India  where  it  is  almost  entirely  wanting;  and  (?)  the 
introduction  of  rediscounting  facilities  w^hich  wauld  greatly 
assist  the  eventual  development  of  Indian  banking. 

Soon  after  the  publication  of  the  report,  the  war 
broke  out  and  the  m.atter  was  deferred.  In  March  1919  a resolu- 


* Shirras,  G,  F.  - Indian  Finance  and  Bankino-,  p,  372. 

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57 

tion  was  brought  forward,  based  on  the  Chamberlain  Commision’s 
report,  to  recommend  the  measures  required  by  it  for  organising  and 
developing  the  banking  system  of  the  country.  It  had  an  instanta- 
neous effect,  for  the  need  of  a central  bank  was  very  keenly'’  felt. 

So  strong  was  the  feeling  in  favor  of  it  that  the  go/ernment 
had  to  appoint  a committee  for  its  consideration  again.  Condi- 
tions were  ripe  at  this  time  for  its  official  approval,  and  the 
proposition  had  its  final  successful  culmination  in  legal  form 
when  the  governm.ent  in  1980  passed  an  act  for  such  a bank. 

Negotiations  between  the  three  Presidency  banks  and 
the  government  with  a view  to  the  amalgamiation  of  these  institutions 
were  started  in  1919,  The  directors  of  these  ba,nks  submitted 
the  scheme  of  amalgamation  and  the  constitution  of  an  Imperial 
Bank  of  India  to  the  sha.reholders . The  banks  pressed  upon  the 
shareholders  the  necessity  of  such  a,n  amalgamation  on  the  ground 
that  the  economic  conditions  after  the  war  had  become  so  complex 
that  such  an  organisation  was  imperatively  necessary.  The 
shareholders  after  much  persuation  by  the  boa.rds  of  directors 
agreed  to  the  scheme  and  sanctioned  the  project  in  1930,  The 
consent  of  the  three  Presidency  banks,  thus,  culminated  in  the 
passing  by  the  government  in  September,  1920, of  Act  47  of  1920 
”An  Act  to  constitute  an  Imperial  Bank  of  India  and  for  other 
purposes."*  Under  this  Act  the  three  Presidency  banks  were 
m.erged  in  the  Irperial  Bank  of  India  on  the  2?th.  January,  1921, 

The  total  authorised  capital  with  the  reserve  fund  of 


♦ The  Indian  Year  Book,  1921,p-273. 


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58 

the  Imperial  Bank  of  India  ^^ill  be  Rs  .150,000,000  as  sanctioned 
by  the  government,  of  W^'ich  the  authorised  share  capital  will 
consist  of  225,000  shares  of  Rs . 500  each  representing-  Rs, 112, 600, 

000  and  the  reserve  fund  Rs .37, 500, 000.*  The  fully  paid-up 
shares  of  the  three  Presidency  banks  at  that  time,  were  as  follows#: 

Bank  of  Bengal,  40,000shares  of 

Rs. 500  each  rs ,20,000, 000 

Bank  of  Bombay ,20, 000  shares  of 

Rs . 500  each  pS .10,000,000 

Bank  of  Madras,  15,000  shares  of 

PS . 500  each  Rs . 7^900,000 

Total  Rs .37,500,000 

It  is  proposed  that  the  paid-up  capital  of  the 
Imperial  bank  shall  be  Rs . 56,250,000  and  that  the  reserve  fund 
shall  be  increased  to  Rs  . 500, 000.  To  effect  this  the  portions 

as  given  below  will  be  contributed  by  each: 

Bank  of  Bengal  including  reserve  Rs . 50 , 000 , 000 

Bank  of  Bombay  ” ” Rs .25, 000, 000 

Bank  of  Madras  ■ " ''  Rs  .13, 750, 000 

Total  RS.  93,'?' 50, 000 

The  Imperial  Bank  will  issue  150,000  new  shares  of  the 
nominal  value  of  Rs . 500  each,  and  on  which  the  sum  of  Rs.l25  will 

* Indian  Year  Book, 1921, p. 373 . 

# Kale,V.G-.  - Indian  Finance,  p.  388. 


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59 


be  payable.  Out  of  this  total  issue,  the  shareholders  of  the 
Bank  of  Bengal,  the  Bank  of  Bombay, and  the  Bank  of  Madras  will 
get  80,000;  40,000;  and  30,000  shares  respectively.  The  scheme 
is  that  each  shareholder  of  the  respective  banks  will  exchange  his 
present  holding  of  shares  for  an  equivalent  number  of  fully  paid 
shares  in  the  Imperial  Bank;  and  in  addition,  for  each  share  so 
exchanged,  he  will  receive  two  new  shares  of  the  Imperial  bank\stock 
at  par,  and  on  these  latter  new  shares  Rs.l25  will  be  immediately 
called  up  and  paid.  The  rest  of  the  amount  on  the  partly 
paid  sh3.res  of  the  Imperial  Bank  will  be  payable  in  the  future  , 

The  organisation  of  the  hank  will  be  controlled  by  a 
central  board,  and  in  each  presidency  there  will  be  a local  board. 
It  will  also  ope n an  office  in  London.  The  governing  body  of  the 
bank  will  be  the  central  board  which  will  consist  of  a general 
manager,  the  controller  of  currency,  the  president  and  vice- 
president  of  each  local  board,  and  the  seer et Airies  and  treasurers 
of  the  local  boards.  The  gotT’ernment  is  represented  on  the  cen- 
tral board  by  the  controller  of  currency  or  some  of  her  officer 
selected  in  "'is  nlace  by  the  governor  general  and  by  not  more  than 
six  other  persons  nominated  by  the  governor  general.  The 
nominated  members  as  well  as  the  secretaries  and  the  treasurers 
of  the  local  boards  will  have  no  voting  power. 

The  function  of  the  central  board  will  be  to  deal 
with  matters  of  general  policy  and  it  will  have  general  power  of 
control  over  the  local  boards.  It  will  also  determine  the  dis- 
tribution of  funds  and  the  fixation  of  the  bank  rate,  and  will 
be  repons ible  for  the  publication  of  the  bank’s  weekly  statements. 


60 


The  local  hoards  wil]  retain  their  existing  constitutions  and 
Will  deal  with  the  ordinary  day-to-day  business  in  their  respective 
territories.  New  local  boards  may  be  formed  at  other  centers 
where  their  presence  will  be  necessitated.  The  Imperial  bank 
will  open  100  new  branches  within  5 years,  and  the  government  will 
have  the  ri?rht  to  determine  the  location  of  one  in  every  four. 

Twenty  of  these  have  been  established  during  19S1,  and  the  follow- 
ing centers  have  been  selected:  Peshawar,  Amritsar,  Lyallpur, 

Rawal-pindi,  l^ltan,  Ambala,  Meeral,  Bareily,  Gorakpur,  Moradaba.d, 
Noakhali,  Asansole,  Larkana,  Dwarwar,  Berampur,  Cudalore,  Jubblepur, 
Cut tuck,  Muzaffarpur,  and  Mandalay.* 

The  Imperial  Bank,  for  the  present,  will  not  manage  the 
note  issue;  and,  therefore',  will  not  have  anything  to  do  with  the 
currency  reserve,  the  gold  standa^rd  reserve,  and  the  coina.ge  of 
rupees.  With  these  exceptions,  the  Imperial  Bank  will  transact 
all  the  banking  functions  of  the  government  which  will  place 
all  st^te  balances  at  its  disposal.  It  will  have  facilities  for 
rediscount ing  bill  s of  exchange  relative  to  Indian  trade  drawn  in 
rupees  or  in  sterling.  Although  the  bank  is  to  act  as  fiscal 
agent  of  the  government  and  to  carry  all  the  government  balances, 
the  government  will  not  participate  in  the  bank ’s' profit  for  the 
first  three  years,  largely  for  the  reason  that  the  establishment 
of  new  branches  will  involve  for  the  immediate  future  considerable 
unprofitable  business.  Moreover,  the  bank  is  to  'ce  compensated 


* The  Economist,  ■V.9S,p,836, 


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61 

for  its  work  as  fiscal  agent  in  connection  with  the  handling 
of  government  securities  and  coupons.  At  the  end  of  three  years 
it  is  to  he  determined  on  the  basis  of  actual  experience  whether 
or  rot  and  to  what  extent  the  government  is  entitled,  to  partici- 
pate in  the  bank’s  profit.* 

The  function  of  the  Imperial  Bank  of  India  as  indicated, 
is  net  truly  speaking  that  of  a central  bank  which  is  supposed 
to  subser\’'e  the  public  interests.  Restriction  in  its  business 
of  note  issue,  of  foreign  exchan<re,  and  cf  gold  standa.rd  reserve 
is  not  a healthy  sij?n  for  a real  centralised  bank.  But,  as  far 
as  its  functions  are  within  its  jurisdiction,  it  is  ably  ful- 
fulling  all  its  duties.  It  has  relieved  the  Financial  Department 
of  the  India.n  G(^rnm.ent  of  much  routine  work  that  rightly  falls 
to  the  bank’s  lot.  It  has  consolidated  the  country’s  credit 
and  has  distributed  it  along  well  defined  lines.  The  bank  is, 
moreover,  demonstrating  its  great  assistance  in  many  ways  to  the 
Secret=<r3^  of  State  for  India  and  the  India  Office  in  London. 


* Bankers'  Magazine,  V,jOS,p,8C4. 


1 ^ 


^4  J.  4..  • T f Tll'dv^  ^ 

■'  ^''v,  ‘:.-\/V  ’..  x..^ll  1 •“ '.f,  ^ 


> p ' ..  - 

' ' ,^-  r*xi  hCfi, 

^ ■' 


■<5.-> 


P4l  .. 

i -'it.  . ■’  ' 'i/' 


'i“.i  i ■ I: 


fc  ?a>4'  i^S  . ^ ' ! 


4 

^’•r  , -iv:  :^  : ' ^ '‘  ^r  ^ ^ 

' T"  . 

..  ''  . -'t'  % ■ ' ' 'Hui  -viji  .'"'i'.’: 


► W 


^ « 


r 


^ v*  l > 

V-  '■  t ^<f't  ».i  .:#.(,  .'i  * * .•  ^ fr ' ^.Ari^  ^ 1 

. _ V '*SSA«,7i  -n.  J 


't, 


’■•''■  '■  IVT  ■ ■.'.  'i;  4T«4f»'jn  * *S'  ■ ; 


*'t  ’"iff '; 


,t/* 


M ‘--’v  **'-'t|*  e#:  fti-  - v5>^„  *»%jro^‘?©!T  a 

^ ^ ' ^ ■ ^■.•^^:;  ■ I 

rv’ ^ 


Ml 

- 'i  /',fw  r -'H 


■■■3jn»y  n»tf«';.  'zg^rry^rr^'" ■"*!-rjr-"J-aiig.; 

K -*■  ■ ■’  . \i*  . » . .j'..'.‘ 


winr-mat^'in'maitL^  bim 


V 


Chapter  VI . 
Conclusion. 


The  condition  of  the  Indian  hanks,  as  has  been  seen  in 
the  preceding'  pag;es,  is  undergoing  a cha,nge  of  great  importance. 
The  government,  as  it  appears,  has  taken  deep  interest  in  the 
growth  of  the  banking  institutions  in  India,  and  has  come  forward 
with  means  at  its  disposal  to  make  banking  a success,  not  only 
for  its  own  primary  benefit  but  for  the  benefit  of  the  people  as 
wel] , With  the  recent  establishment  of  the  Imperial  Bank  of 
India,  the  country’s  banking  trade  is  on  the  way  of  progress,  and 
much  depends  upon  its  promotion  for  it  will  determine  whether  or 
not  the  other  industries  are  likely  to  have  any  chance  for  further 
development.  Rightly,  the  couse  of  establishing  the  central 
bank  has  been  chosen  by  the  government  because  efficient  banking 
is  an  imperative  necessity  for  a growing  commercia.!  country. 
India’s  commerce,  during  the  war,  has  grown  tremendously,  but 
unfortunately  her  banking  institutions  have  not  kept  pace  with  it. 
One  of  the  reasons  for  the  establishment  of  the  Imperial  Bank  is 
to  meet  the  commercia.1  growth  of  the  country. 

India  has  been  known  to  the  outside  world  as  a country 
whose  people  are  very  apt  to  hoard  money.  Is  it  not  the  same 
case  with  the  people  of  other  countries  where  there  are  or  were 
at  one  time  very  few  banking  institutions?  The  spread  of  the 
bahliing  habit  among  any  people  does^not  come  unless  encouraged  by 
bankino-  institutions  which  are  strong  enough  to  command  the 
respect  and  confidence  of  the  people.  Education  in  that  respect 


I..  , A.  -.  ■„  ^ - 


» « .if  '“^ 

■ f y ■ ® 


*.46 


Mlf  i.'-  tf  r...  ' J;I  '.  ^ 

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' ■ I V-  • Ifi.^  /’  „'  > J,  15T,  ■;#:"*  VT/"'. 

' rvr.  /4ir'‘%- , • T ?7fTf  .p3cil-rk* 

■'  -^1:  .-'  -'V  " - ..  ,, 


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'XV 


I . t . 


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"gagg^f' 


33 

is  the  only  remedy  which  can  cure  the  hoarding  ha.bit.  In  nearly 
every  country  the  government  has  interested  itself  in  the  estal>- 
lishment  of  hanks  and  hanking  firms,  and  where  there  is  such  an 
interest  on  the  part  of  the  D:o’’'ernment , hanking  has  advancedj 
hanklnp'  has  adx^.nced;  and,  consequently,  the  hahit  of  the  people 
for  privately  hoarding  is  less  in  evidence  than  in  India.  Until 
recently,  the  Indian  government  has  done  very  little  for  such 
enterprises,  and  credit  must  he  given  to  bankers  and  hanking  firms, 
net  connected  with  the  government,  for  whatever  spread  of  good 
hanking  habits  there  ha.s  been  among  the  Indian  population.  People, 
as  a rule,  do  not  have  as  much  confidence  in  a priva.te  institution 
as  the37-  have  in  a government  controlled  or  supervised  one. 

Recently  the  Indian  government  has  realized  the  need  and 'its 
own  responsihili ty  in  the  matter  and  has  taken  at  least  the  steps 
necessary  to  develop  a strong  hanking  system  which  will  give  the 
people  improved  financial  advantages. 

The  spread  of  the  hanking  hahit  among  the  Indian  people 
should  hot  he  judged  from  the  amount  of  deposits  or  from  the 
number  of  checks  issued;  hut  it  should  he  judged  from  their 
investments  in  the  government  papers,  bonds,  and  war  loans.  To 
determine  the  haiiking  hahit  of  the  people  from  deposits  would  he 
misleading,  for  Indian  deposits  are  not  the  total  deposits  of  all 
the  people  who. have  a surplus  of  money;  brt,  are, on  the  contrary, 
only  the  deposits  of  the  big  merchants  of  the  country,  European 
as  well  as  Indian.  Similerly,  in  the  case  of  checks,  they  are 
no  true  indication  of  the  amount  of  financial  business  of  all  the 
people;  for  they  are  only  issued  by  the  same  merchant  houses  and 


t.  ;■ 


■1  -( 

V r?- 


1 t ^ • ,.  Jar  .'.*41  «i 


I l-its  vi  '^V.  iSi 

If  jtJK^'  ? ’ '-■'■/  i *'  I? 

if  ,.*!▼  ‘■Tfv-v'i  '^  • ''%V'!W*^ - 


4.%, 


M 


. J I — ■ .1  . ^ - T .M< 


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;-y-BSii.:.yt  '?•.'* U '.i  :.;*f^  ife m'-.- 

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’tjf  i4*)|5jj|r 


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m 


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>-VrCiVv'%5  !'^’  X^fl*RS'»L  . f 

; f£ ' iT;'  ? ^ ; < *fi ix^^'O  0 c " 1 ' ^ ‘ ^ 

.r  V . *^ ; t 5 V B.^rf , »P^  , flr‘i. '.  T*  iV ' ' ? ' • j--  I.C^t  » '^’  ,‘^^- 


ri'i  ^ '-'  :'•  ^ ^ ■'  mHtj^  nis  I : 

' rsi  ■’ 


■ '^~ik 


' 'if 


fi^L-i  d 7ii 


«■  * 


1 


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J ■ ■ VJ  -f 


■j.4!^ji;;^  . Tjay!B-jtEi".y5ge^^ -■ 


i ipi 


64 

"by  a few  rish  t)ersons.  In  other  countries  numbers  and  amounts 
of  deposits  and  checks  are  a means  by  which  the  banking  habit  and 
the  amount  of  business  could  be  determined,  but  for  India  they 
are  of  no  value  as  the  people  neither  deposit  nor  issue  any  checks. 
The  reason  is  that  the  m.ajority  of  them-  do  not  have  any  confidence 
in  banking-  firms  not  connected  with  the  government. 

The  investments  by  the  Indis-n  population  in  the  gcvern- 
m.ent  loans  and  bonds,  on  the  o"^her  hand,  will  shov^r  the  attitude 
of  the  people  toward  hoarding  money.  The  investing  habit  is  not 
without  relevance  to  the  present  discussion  of  the  banking  habit, 
for  as  scon  as  a me.n  begins  to  invest  his  savings,  the  time  must 
com.e  eventually  when  he  will  use  a bank  provided  of  course  there 
is  one  conveniently  near  which  he  will  trust. 

The  growth  of  the  investment  habit  among  the  Indians 
has  been  strikingly  increased  lately  by  the  operations  of  the 
Indian  war  loans  and  the  selling  of  cash  certificates.  It  was, 
of  course,  the  result  of  an  energetic  propaganda  and  an  appeal  to 
the  patriotism,  of  the  investors,  but,  never thless,  some  will  con- 
tinue  to  make  their  investments  in  the  governm.ent  securities. 

Before  the  war,  many  people  had  their  surplus  money  invested  in 
government  bonds  and  other  papers,  and  they  did  not  have  their 
raone^’-  in  the  banks  because  not  much  facilities  for  it.  The 
investments  also  m.ade  by  the  people  in  the  governm.ent  post  offices 
reach  a considera.ble  am.ount,  and  this  is  a further  evidence  of 
the  people’s  habit  to  use  the  surplus  money  and  not  to  hoard  it. 

In  spite  of  many  discouragements  for  keeping  their  m.oney  with  the 
baTiks,  there  is  undoubtedly  a growing  tendency  amiong  the  people 


J r\  ’I' 

. ^ !'• 


V'  ^ v‘  * '*'►  ’^V^  ' ■ I * • y''  "**  ' ' ""  • ‘’'  •*  ' \ * *(l*!''^ 

ff,.i^ It"*-,  •.'>■:*■:  Lt5,' ;V'  bfi  ,<-  fo-  5t  ) I5^‘54i*i;'»  q 


f-^  >' 


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.r  - - ■ f rj.  •»  y m . ?rt.  2» ?"■/  ^ v'R 


65 


towards  depositing  in  the  banks  at  present. 

With  respect  to  banking  facilities  and  the^r.ounts  handled 
by  banks,  there  is  no  comparison  between  the  position  of  India, 
and  that  of  western  countries.  On  31s^  . December,  1917,  the 

bai-nks 

number  of  head  offices  and  branches  oi^for  315,000,000  people  of 
India  was  only  402.*  Canada  with  a population  of  less  than 
10,000,000  had  on  31st.  October,  1918,  3,306  bra.nches  of  banks. 
After  the  signing  of  the  armistice,  nearly  500  new  branches  were 
opened  in  that  Dominion.  It  is,  therefore,  ver3r  evident  that 
the  few  sub-stations,  agencies,  and  branches  established  or 
proposed  by  the  Imperial  Bank  and  other  banks  are  not  adequate 
to  create  good  banking  fe.cilities  throughout  the  country.  The 
banking  requirements  of  India  which  is  nearly  two- thirds  the 
area  of  the  United  States  of  A.nierica,  could  not  possibly  be  met 
by  the  few  branches,  which  now  exist,  of  the  Imperial  Bank  and 
other  banks.  Practically,  there  is  net  a single  bank  in  any 
tow^n  having  population  from  fifty  thousand  to  a hund.red  thousand. 
Many  commercial  centres  of  India  have  no  banking  institutions, 

paopW 

and  where  the  sound  places  of  deposits  are  lacking,  the,^with  small 
surplus  at  their  disposal  either  keep  it  in  the  form  of  gold  or 
silver  or  ornaments,  or  entrust  it  to  the  local .money  -lender. 

The  facilities  for  investment  even  in  g-overnment  securities  are 
still  inadequate. 

In  connection  with  the  establishment  of  branches,  the 


* Appendices  to  the  report  of  the  com.mittee ,V, 8,  130. 


'■■  \ *t'y  f i.A 

'VTti%'t;.fe./',_j,;i;;;  *■.. 


f VT  < 


"4'V'.!ST  :» 


I ‘'U 


'■,  J 'v^Bi'?}.  Vit'i 

.,;,(»-Wr  i»st  ■ai’i'.r  la  ,«i’(S.-rfi 


i€ 


'*»? 


f,  iV-  ..;  f 


• ■-: 


■ y „'^  - '„J  ^'■"'  ..A, 


iv.  Vj  itt 


{fj|l  *tG 


.*.  i si?*  ]{f ',  ^ f;i^' ' Cl! $■  \:  ,. \ »,  »<r  ‘ c'  " '' 


^*:.'' ,./;»  r 

f'^,  ^ • • 'it  '■'*  "if’  t ' ''' *^  ^ '; • ' .'j 

1 -j  ; r 545»:*}Vt^  ■ ,'^(tuai ^ .13* ' > *:  f 

vv  ■'  -•'%’*■-  ',  ■ ; * - '*  ....  V‘‘  '■■  ■ *.  y.  ' ' '•-’ 

. r •’  *•  nw  4i 

1 


■‘^•‘  ^ '■'  ■ ‘ Jv‘  1 " ■ < j <■'  ■ - 

V-:;  I ,•  .'CT  'ft /3M®  r>  - 


•.  5<i. 


i.  . ...  ‘1*! 


Tfw'fw; -j'  ■■'  '^1 

■ ' ‘A  ,<,-,jV 


■’  ' ■ f ^ i^Bi  ■'jilf;'-’ 7, 


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^’■-  .'■'’'if '"' '’■■•*  . . ■ Aip.  • 


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•- “ 1 Uijp..’',  ■ f ^ 'o® , -v: '-  «t  c 


) iy”  ; ^ , 7 , 1 1;  «’ ’ 


« ■•&. 


» . f. 


',r'  «. 


66 


answers  of  Mr.  Bomanji*,  an  Indian  representative  of  the  Mer- 
chants 'Chamber  and  Bureau,  to  the  questions  of  the  Indian  Comn'ittee 
on  Exchan-^e  and  Finance,  are  of  much  interest ; and,  therefore, 
they  have  been  reproduced  verbatim, 

” Do  you  sug'p-est  that  it  would  be  a ^reat  advantage  if  the 
banks  were  to  establish  branches  more  widely?  - Yes, 

” Will  you  explain  to  us  what  the  adva.ntage  would  be?  - Why 
does  the  poor  m.an  hoard  his  silver,  or  is  gold, or  whatever 
it  may  be?  Because  he  has  no  bank  facilities,  We 
want  banking  facilities,  and  that  will  aleviate  all  the 
complaints  that  v^e  are  having  so  much  about  in  regard  to 
hoarding. ” 

Mr.  Bomanji  in  the  end  points  out  four  advantages  to  be  obtained 
by  the  establishment  of  numerous  branches  throughout  India,  by 
the  banks , They  are ; 

1.  Hoarding  of  coin  and  bullion  would  diminish. 

2.  The  necessity  of  coirlng  laree  quantities  of  silver 
w oul d di s appe ar . 

3.  The  circulation  of  paper  currency  would  increase. 

4.  Opportunities  would  be  afforded  to  Indians  to  learn 
western  method  of  banking  and  to  t-ake  higher  appoint- 
ments in  the  Imperial  Bank  and  Excha.nge  banks. 

The  Indians  believe  that  the  Imperial  Bank  of  India  should  open 
more  branches  than  already  have  been  established  or  proi^osed. 


* East  India  Committee  - Munites  of  Evidence,  V.  2,  p.l97. 


'HT 


t 


P I ' •»  ’» 


~\t 


tiTTir  >11111  r'  "i'‘iiilf 


!C 


■;  \n 


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I 


'»*  If  »•!»'  ■•  iftf  I'i  iWjJ- o#  ..•.‘tBjril’  «iS»_ 

cftwii'  tc  4*T^  . i” 

, . '....'li  \ . -MW'  v* 

- ■' ■<  ? :*s*  •^i;  i’ *'■  ifo?"'’ 

‘ .'  ■ >7  Jr®  TXa  , ^^«^’>  , 

"j  '-■.2io-'  b|  nf^-' ®|r,- 


tA 


■ ...  -ir-*  vt  ■,.,  .■/r^i-: ; • ij  . /'f!|i'‘«^ 


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.ii  ',S®I  J7:  v>~  \ 'W;m 


y ipywy.  I 


They  urge  the  central  hank  to  have  many  branches  because  of  the 
fact  that  it  is  sound  in  business  policy.  It  is  restricted  by 
the  government  to  a certain  extent,  and  it  is  quite  safe  for  the 
investments  of  the  poor  people.  The  execution  of  such  a programme 
of  opening  many  branches  would  involve  the  appointments  of  a very 
larc’e  trained  Indian  Staff,  where  only  a limited  supply  now  exists. 
It  is  only  right  that  the  Imperial  Bank  should  have  the  power  to 
call  on  the  government  to  establish  ^so  the  educational  facilities 
necessary  to  furnish  a sufficient  supply  of  men  trained  in  banking 
and  commerce  from,  which  the  requisite  staff  might  be  recruited. 

The  government  should  take  the  initiative  and  establish  such 
com.rrerci al  schools  and  colleges  as  to  qualify  young  men  with  suffi- 
cient knowledge  for  the  banking  t re.de  of  the  country. 

To  sum  up,  India  needs  many  banking  houses.  If  the 
trade  of  the  country  is  to  be  fostered,  then  bankers  and  banking 
firms  are  indispensable.  Both  must  go  together,  as  the  one 

without  the  other  can  not  stand  nor  progress.  F-urthermore , 

India  must  ha,ve  her  own  efficient  men  to  conduct  the  operations 
and  should  not  depend  on  outsiders.  In  order  to  have  such  highly 
trained  and  competent  men,  she  must  lay  cut  plains  for  education, 
and  com.pel  the  government  to  carry  out  such  plans.  Happily, 
the  University  of  Calcutta  has  opened  several  courses  to  qualify 
candidates  for  banking  positions.  Sir  Ashutosh  Mukhsrjee,  the 
Vice-chancellor  of  the  university,  who  has  done  sc  much  for  the 
disemination  of  knowledge  in  almost  all  branches  of  studies,  ha.8 
the  credit  and  honor  for  introducing  the  commercial  a.nd  banking 
courses  in  the  said  universit3r  recently. 


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BIBLIOGRAPHY. 


Attfield,  J.B. 

English  and  Foreign  Be^nks 

London,  Effingham,  Wilson  •&  Co.,  1893. 


Cooke,  Charles  N. 

The  Rise , Progress , and  Present  Condition  of  Banking 
in  India. 

Calcutta,  P.  Cranenhurgh,  1863, 


D oral 8 warn!,  S.  V. 

Indian  Finance,  Currency  and  Banking 
Madras,  S.  S,  Doraiswami , 1915, 


Dunbar,  Charles  F. 

Chapters  on  the  Theory  and  History  of  Banking 
New  York,  G.  ?.  Putna,m’s  Sons,  1901. 


Dupe  me  X,  H. 

People’s  Banks  for  Northern  India 
Calcutta,  Thacker,  ppink  Co.,  1900. 


Handy,  William  M, 

Banking  Systems  of  the  World, 

Chicago,  Charles  H.  Kerr  and  Company,  1897. 


Hull,  Walter  H. 

Practical  Problems  in  Banking  and.  Currency 
New  York,  The  Macmillar  Company,  1907. 


Indian  Currency  and  Finance 

Bombay,  Bennett,  Coleman  ^ Co.,  l'^13. 


The  Indian  Year  Book,  1920  and  1921 
Bombay,  Bennett,  Coleman  Co. 


Kale,  Vaman  G, 

Indian  Economics 

Poona,  Aryabhushan  Press,  1920. 


69 


Keynes,  John  M.’ 

Indian  currency  and  Finance 

London,  Macmillan  and  Co.,  Limited,  1913. 


Shirras,  C-eorge  F, 

Indian  Finance  and  Banking- 

London,  Macmillar  and  Co.,  Limited,  1920. 


Speeches  of  the  Honourable  Mr.  C.  K.  Gokhale 
Madras,  G,  A.  Natesan  Co . , 190- 


Documents  . 

East  India  (committee  on  Indian  Exchange  and  Currency) 
Appendices  to  the  Report,  V.  Ill 
London,  His  Majesty's  Stationary  Office,  1920. 

East  India  (Committee  on  Indian  Exchange  and  Currency) 

Minutes  of  Evidence  taken  before  the  Committee,  7. II 
London,  His  Majesty's  St'-’tionary  Office,  1920. 


East  India  (Progress  and  Condition) 

Statement  exhibiting  the  progress  and  condition  of 
India.  7.  55  and.  56. 

Lon3.on,  His  Majesty’s  St^’tionary  Office,  1919-20. 


Indian  Government  - Finance  p,epartment 
Financial  Statement  and  Budget 

Delhi,  Government  Printing  Press,  1914-15  and  1917-16. 


United  States  of  America  - Dept,  of  Commerce 
Special  Consula-r  Reports,  7,  72. 

Washino-ton,  Government  Printing  Office,  1915. 


Periodicals: 

”The  Imperial  Bank  of  India"-  Bankers’  Magazine,  7.102. 
New  York,  The  Bankers  Publishing  ciO.,  1921. 


"Indian  ban'^ing"  - The  Economist,  7,  92 
London,  C.  Reynolds,  1921. 


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